Purpose of the Bill

The bill aims to modify the expiration of the passthrough entity tax provisions in Minnesota. This involves adjustments to the rules concerning how certain income from partnerships, S corporations, and limited liability companies (LLCs) is taxed. The adjustments focus on clarifying and extending the processes by which these entities may report taxes.

Main Provisions

• Definitions and Application: The bill specifies the definitions for "income," "qualifying entity," and "qualifying owner" with respect to passthrough entities like partnerships and S corporations. It considers the taxation status under the Internal Revenue Code to determine the allocation of income for residents and nonresidents.

• Tax Election: Qualifying entities can elect to file a return and pay passthrough entity tax. This election:

  1. Must be made by a specific deadline.
  2. Excludes partners or owners who do not meet qualifying criteria.
  3. Requires agreement from more than 50% of the qualifying owners.
  4. Is binding and irrevocable for the taxable year it's elected for.

• Tax Calculation: The tax imposed on these entities is determined by calculating the sum of the tax liabilities of each qualifying owner.

  • The liability is calculated using the highest tax rate for individuals.
  • Credits or deductions are allowed only as per the owner's tax situation.

• Estimated Tax and Credits: Owners must pay estimated tax if liabilities exceed certain thresholds, but can fulfill this via the passthrough entity tax payments. Credits claimed by owners affect the ability of entities to receive refunds.

• Filing and Returns: The entity tax return is treated like a composite return for tax purposes. Even when a nonresident owner has no other Minnesota source income, filing this return satisfies state filing requirements, provided the primary income is from the qualifying entity.

• Expiration Clause: The passthrough entity tax provisions are set to expire for taxable years after December 31, 2027, which aligns with federal tax code sections, but does not limit the state's authority to audit past years.

Significant Changes

• Extends and clarifies the passthrough entity tax rules for qualifying entities beyond the current expiration dates.
• Provides a structured process for electing and determining tax obligations ensuring clearer compliance for businesses and their owners.

Relevant Terms

passthrough entity tax, qualifying entity, qualifying owner, partnership, S corporation, Internal Revenue Code, tax liability, composite return, estimated tax, Minnesota source income.