One Minnesota Budget

On May 24, Governor Tim Walz signed into law the “One Minnesota Budget,” which impacts virtually every facet of Minnesota’s taxation regime.  Broadly, the One Minnesota Budget attempts to increase taxes on wealthier individuals and on corporations, especially those with a global footprint.  The legislation also clarifies and updates certain provisions, including those relating to Minnesota’s elective pass-through entity tax. 

Personal Income Taxes – Net Investment Income Tax

Much like Massachusetts, Minnesota considered ways to impose an additional tax burden on its high-income earners.  The Minnesota legislature was considering adding a new top level personal income tax bracket of 10.25%.  The signed legislation, however,

• Imposes a 1% tax on net investment income, as defined in the Internal Revenue Code, of over $1 million earned by Minnesota residents.
  • The federal definition of net investment income includes income from interest, dividends, capital gains, rental and royalty income, and certain annuities.
• Explicitly adds the net investment income tax as a deductible tax expense in many instances.

The net investment income tax is effective for taxable years beginning after December 31, 2023. 

Personal Income Taxes – Other Provisions

The legislation not only imposed a new tax on net investment income, but it also reduces deductible expenses for certain individuals.  Effective tax years beginning after December 31, 2022,

• Individual taxpayers filing jointly with income over $220,650 must reduce their itemized deductions by the lesser of
  • Three percent of the taxpayer’s adjusted gross income over $220,650 but less than or equal to $304,970 and ten percent of the taxpayer’s adjusted gross income over $304,970; or
  • 80% of the taxpayer’s itemized deductions.
    • The 80% haircut effectively limits the reduction to a maximum of 80% of a taxpayer’s itemized deductions.
  • Taxpayers with adjusted gross income over $1 million must reduce their itemized deductions by 80%.
  • Married individuals filing separate returns would calculate these amounts using half of the adjusted gross income thresholds.

Corporate Income Taxes

The One Minnesota Budget also expanded the tax base for corporate taxpayers.  For taxable years beginning after December 31, 2022,

• Net operating losses can offset up to 70% of a taxpayer’s taxable net income whereas, previously, net operating losses could offset up to 80% of taxable net income.
• The dividends received deduction is reduced from 80% of dividends received to 50% if the taxpayer owns 20% or more of the payor’s stock.
• The dividends received deduction is reduced from 70% of dividends received to 40% if the taxpayer owns less than 20% of the payor’s stock.
• Global intangible low-tax income (“GILTI”) is affirmatively included in Minnesota’s tax base as dividend income.
  • A significant portion of GILTI in taxable income will remain in Minnesota’s tax base considering the reduced dividends received deduction.

Pass-Through Entity Tax

One Minnesota Budget made refinements to the Minnesota’s elective pass-through entity tax including:

• The definition of “income” now states that resident qualified owners of qualifying entities taxed as partnerships are not allowed to allocate the qualified entities’ income.
  • Nonresident qualified owners of qualifying entities taxed as partnerships and all qualified owners (i.e., both residents and nonresidents of Minnesota) of qualified entities that are S corporations are permitted to allocate the entity’s income.
• The definition of “qualifying owner” was expanded to include “a disregarded entity that has a qualifying owner as its single owner.”
• Minnesota also added a provision that states that the PTET provision expires when the federal state and local tax deduction cap of $10,000 expires.
  • Effectively, this provision allows Minnesota’s PTET provisions to continue if the federal cap on deductible state and local taxes is extended.

General provisions

The One Minnesota Budget provides for several sundry updates including the following:

• Provides a $1,750 credit per qualified child.
• Effective for taxable years beginning after December 31, 2022.
• Updates IRC conformity from December 15, 2022 to May 1, 2023.
• Generally effective the day following final enactment.
• The sales tax exemption for the sale of tangible personal property used primarily in a or business if the sale is not made in the normal course of business is now expanded to cover the sale between the sole member of a disregarded LLC and the disregarded LLC itself.
• Effective for sales and purchases made after June 30, 2023.

Additionally, as a part of its legislation adopting adult-use cannabis, Minnesota joins a small number of states such as Illinois and New Jersey that decouple from Internal Revenue Code IRC Sec. 280E, thereby allowing cannabis businesses in Minnesota to deduct ordinary and necessary business expenses that they may not deduct for federal income tax purposes. 

In a third bill, Minnesota imposes a $0.50 fee on retail deliveries of $100 or more in Minnesota effective July 1, 2024.  The tax is imposed on all retailers, including retailers located outside of Minnesota and marketplace providers, but has an exemption for small businesses.