New Minnesota Omnibus Tax Bill Signed into Law

Minnesota recently signed the omnibus tax bill, HF 1938, into law. This law updates Minnesota’s IRC conformity date from December 15, 2022, to May 1, 2023, for purposes of administration and compliance, individual income tax, corporate franchise tax, estate tax, and property tax refunds.

The bill includes many provisions, including (but not limited to) the following major items:

Net Operating Loss (NOL) Deduction

Net Operating Loss (NOL) deductions decreased from 80% of income to 70% of income for tax years beginning after December 31, 2022.

Global Intangible Low-Taxed Income (GILTI)

For tax years beginning after December 31, 2022, Global Intangible Low-Taxed Income (GILTI) will be included as dividend income. This means it can qualify for the Dividends Received Deduction.

Minnesota will continue to decouple from the 50% GILTI deduction under IRC section 250.

Dividends Received Deduction

Dividends Received Deduction decreased for tax years beginning after December 31, 2022:

Deduction is reduced from 80% to 50% for recipients with 20% or more ownership (the remaining 50% may be deductible in certain circumstances).
Deduction is reduced from 70% to 40% for recipients with less than 20% ownership.

Changes to Itemized and Standard Deductions Based on Adjusted Gross Income (AGI)

For tax years beginning after December 31, 2022, there will be changes to itemized and standard deductions based on adjusted gross income (AGI).

For taxpayers with AGI over $220,650, the itemized or standard deduction is reduced by the lesser of the following:

3% of the excess of the taxpayer's AGI over $220,650 but not over $304,970, plus 10% of the taxpayer's AGI over $304,970.
80% of the amount of the taxpayer’s itemized or standard deductions.

For taxpayers with AGI over $1,000,000, the itemized or standard deduction is reduced by 80%.

Pass-Through Entity Tax (PTET)

Pass-Through Entity Tax (PTET) regime is amended and includes the following changes:

Inclusion of a resident owner’s un-apportioned distributive share of income to the tax base.
Clarification that “qualifying entity” includes an LLC that is taxed as a partnership or S corporation.
Expansion of the definition of “qualifying owner” to include a single-member LLC whose owner is a qualifying owner. Additionally, tiered PTEs are allowed to elect to file and pay the PTET.
Requirement that federal adjusted gross income be calculated excluding any tax payments deducted under Notice 2020-75 (generally, income taxes paid by pass-through entities).
Allowing a qualifying owner to take a credit for PTETs paid to another state.
Removal of the requirement that the election may only be made if a qualifying owner’s state and local tax (SALT) deduction is limited federally and sunsets the PTET when the federal SALT deduction cap expires.

Net Investment Income Tax

Individuals, estates, and trusts with net investment income over $1,000,000 will be taxed on the amount in excess of $1,000,000 at a rate of 1% beginning after December 31, 2023.

For purposes of the NIIT, Net Investment Income includes gross income from interest, dividends, annuities, royalties, and rents that is not derived in the ordinary course of a trade or business, less any deductions allowed, and excluding the net gain from the disposition of agricultural land and buildings.

For nonresidents and part-year residents, the tax is calculated as if the individual is a full-year resident of Minnesota. NIIT liability is then determined by multiplying the total NIIT by the allocation percentage (MN Net Investment Income / Total Net Investment Income). This same allocation percentage is also applied to estates and trusts.

Direct Tax Rebate Payments

Direct tax rebate payments will be issued to eligible taxpayers:

$520 for joint filers with AGI of $150,000 or less.
$260 for all other individuals with AGI of $75,000 or less.
$260 for each dependent claimed, up to three dependents, for joint filers with AGI of $150,000 or less and for all other individuals with AGI of $75,000 or less.

Refundable Child Tax Credit

A $1,750 refundable child tax credit per qualifying child, phased out beginning with joint filers earning in excess of $35,000 or $29,500 for all other filers.

Moving Forward Under the Minnesota Omnibus Tax Law

Working with experienced tax professionals can help you navigate the complexities of state tax laws in a way that minimizes cost and stress.