New Opportunity for Minnesota Business Owners to Deduct State Income Taxes

The State of Minnesota recently enacted legislation that includes a new elective business deduction for the payment of state income tax. Certain qualifying S-Corporations, limited liability companies, and partnerships may elect to pay state income tax on the owners’ business income at the entity level. This law effectively provides certain Minnesota business owners the opportunity to bypass the $10,000 limitation on the deduction of state income taxes.

Electing entities compute the tax by applying Minnesota’s highest income tax rate of 9.85% to each business owner’s share of adjusted Minnesota taxable income for the year. Electing entities pay the tax by making quarterly estimated tax payments to Minnesota Revenue. These payments are an ordinary business deduction, passed through to the owners as a direct reduction of taxable business income on their Federal tax returns. In addition, these tax payments pass in full to the owners of the qualifying S-corporation, LLC or partnership to be claimed as a credit on their personal Minnesota income tax return.

To qualify, a business must have only individuals, trusts, estates or entities disregarded for tax purposes as owners. Owners can be Minnesota residents or non-residents. Single-member LLC’s, which are an entity disregarded for tax purposes, do not qualify for this election.

The election is an annual decision, and is filed with the business entity’s tax return for the year by the due date for that return. The election is irrevocable for that tax year, and is binding on all owners of the business. If the Federal limitation on the deduction of state income taxes should end because of future legislation, this Minnesota election and its benefits will become immediately unavailable for the year of that change.

Not all qualifying businesses will benefit from the election every year. Because the tax calculation and related deduction is based upon the business’s taxable profit, there is no benefit from making the election if the business has sustained a loss for the year. Certain state-level subtractions or credits can further reduce taxable profits for purposes of this calculation. For businesses that operate in multiple states, the tax is calculated only on income apportioned to Minnesota.

The regulations, forms and instructions for this new law are still in process with Minnesota Revenue, but we anticipate having complete information a bit later this year. Your CKCO advisor will be getting in touch with you to discuss taking advantage of this significant tax opportunity for 2021.