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How the American Rescue Plan Act of 2021 will affect Minnesota taxpayers

By Dan Kidney, CPA, JD

On March 11, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA), P.L. 117-2.  Even though most of the ARPA’s provisions provide funding for government agencies and expand the nature and scope of the United States’ social safety net, some of its provisions affect income and tax-related changes, stimulus checks and unemployment benefits.
Because Minnesota only conforms to the Internal Revenue Code (the “Code”) as amended through Dec. 31, 2018, under its “fixed conformity” system, the state does not conform to any of the provisions of the ARPA. Legislation is required for Minnesota to conform to the ARPA’s changes. 
The discussion below highlights the Minnesota tax implications of the primary tax-related changes caused by the ARPA. 
In addition, it’s interesting to note that as reported on March 12 by the New York Times (in an article that quotes Minnesota House Speaker Melissa Hortman), states like Minnesota might be prohibited from “paying for” conformity to federal tax provisions such as those enacted by the ARPA due to the ARPA’s language prohibiting states from using its funds to cut state taxes “by legislation, regulation or administration” through 2024.

Provisions Affecting Individual Taxpayers

Creation of $1,400-per-person recovery rebate for 2021 (new IRC Sec. 6428B)

Under Sec. 2201 of the CARES Act, Congress provided recovery rebates for the 2020 tax year of up to $1,200 per qualifying adult ($2,400 for joint filers) and $500 per qualifying child. The first two rounds of recovery rebates paid during 2020 were considered a refundable tax credit that wasn’t included in 2020 federal taxable income, and economic impact payments (EIPs) were considered an advance payment of this credit. 
Despite its nonconformity to the CARES Act, Minnesota does not include the recovery rebates in 2020 taxable income. This is because, as the Minnesota Department of Revenue’s website indicates, these amounts “are considered a federal tax credit.” 
Because the 2021 $1,400 recovery rebate created by the ARPA also functions as a refundable tax credit, Minnesota currently will not include those rebate payments in 2021 Minnesota taxable income. This outcome should not change even if Minnesota were to advance its Code conformity date to March 11, 2021.

Expansion of the child tax credit/earned income tax credit

The ARPA temporarily increases the amount of these credits, and the IRS is expected to issue monthly checks as advance payments towards this credit from July to December 2021. If the total of these advance payments exceeds what a taxpayer was entitled to, then the excess would be included in a taxpayer’s 2021 federal taxable income. 
Because the taxability of this difference would likely also have existed under the pre-ARPA Code, Minnesota would presumably also include this difference in taxpayers’ 2021 Minnesota taxable income under its current law.

Extension of excess business loss limitation (Sec. 461(l)) for noncorporate taxpayers

The excess business loss limitation of Code Sec. 461(l), imposed for tax years 2018–2025 by the Tax Cuts and Jobs Act but suspended for tax years 2018–2020 by the CARES Act, was extended by the ARPA through 2026. 
Minnesota law currently conforms to Sec. 461(l) for tax years 2018–2025, but not to the CARES Act’s suspension of Sec. 461(l) for 2018–2020, and not to the ARPA’s extension of Sec. 461(l) through 2026.

2020 tax exemption for up to $10,200 in unemployment benefits (new code Sec. 85(c))

Under a last-minute addition to ARPA, a taxpayer’s 2020 federal gross income excludes up to the first $10,200 of unemployment benefits. According to IRS guidance issued on March 12, 2021, this exclusion is reported as a negative number on Schedule 1, line 8 of a taxpayer’s 2020 Form 1040, though the IRS also urged taxpayers “not to file amended returns related to the new legislative provisions or take other unnecessary steps at this time.”  
Minnesota law currently treats all unemployment compensation as taxable for the 2020 tax year, though legislation has been proposed in the Minnesota House (H.F. 1658) to make it nontaxable.  However, because the ink has barely dried on the ARPA as of the date of this article, Minnesota’s 2020 individual income tax nonconformity schedule (M1NC) does not yet contain the 2020 addition modification required to implement Minnesota’s nonconformity to this $10,200 exclusion. Hopefully, the Minnesota Department of Revenue will issue guidance about this issue in the near future.

Expansion of student loan forgiveness (amended code Sec. 108(f)(5))

Under the ARPA, eligible student loans discharged in 2021 through 2025 are excluded from taxable income, regardless of the reason for the discharge. Because Minnesota law currently doesn’t conform to the ARPA, these 2021–2025 student loan discharges would be included in Minnesota taxable income for those years unless the taxpayer qualified for an exemption under the pre-ARPA version of Code Sec. 108, such as for insolvency. 

Provisions affecting business taxpayers

Extension of the employee retention credit (ERC) (CARES Act 2301(e))  

For tax year 2020, wage expenses that are credited under the ERC are treated as nondeductible, at least for corporations, under CARES Act Sec. 2301(e). Because Minnesota law conforms to a pre-CARES Act version of the Code, it doesn't conform to this provision. For this reason, Minnesota’s 2020 corporate tax form (Form M4NC line 4) already reflects the subtraction modification required to restore the state-level deductibility of these wages. 
Because the ARPA merely extends this federal tax credit (from June 30, 2021, to Dec. 31, 2021), this Minnesota subtraction modification would simply exist again for the 2021 tax year under current law.

Extension of the FFCRA paid leave credit

The ARPA extends tax credits for employer-provided paid sick leave created under Sec. 7001 of the FFCRA (P.L. 116–127) through Sept. 30, 2021.
For tax year 2020, this credit was already excluded from Minnesota taxable income (see 2020 Form M1NC line 18). This exclusion should continue for tax year 2021.

Clarified tax treatment of targeted EIDL advances 

Targeted EIDL advances were created by CARES Act Sec. 1110(e) and originally made taxable, but were made nontaxable under Sec. 278 of the 2021 Consolidated Appropriations Act (“2021 CAA”). Sec. 9672 of the ARPA further clarifies that targeted EIDL advances are not included in a recipient’s gross income and that no deduction shall be denied, no tax attribute reduced, and no basis increase denied as a result of their receipt.
For the 2020 tax year, Minnesota’s forms already include targeted EIDL advances in Minnesota taxable income (e.g., 2020 Form M1NC line 24), as a result of its nonconformity to the 2021 CAA. The adoption of the ARPA should not change this outcome for the 2020 or 2021 tax years. 

Creation of restaurant revitalization grants

New for the 2021 tax year, Sec. 9673 of the ARPA provides that the income from grants made from the Restaurant Revitalization Fund will be nontaxable, and that expenses paid with Fund proceeds will be deductible.   
For the 2021 tax year, because Minnesota law does not conform to the ARPA, Minnesota should treat these grants as Minnesota taxable income, but should not limit the deductibility of expenses paid for with grant proceeds. 

Silence about “mobile workforce” provisions

The ARPA didn't contain any language about the so-called mobile workforce provisions (e.g., 2020 S. 3885, S. 4318, or H.R. 8056), which many believe are unlikely to be enacted in 2021. As a result, Minnesota currently does not face any barriers to imposing its individual income tax upon nonresident individuals whose income exceeds the state’s minimum requirements, even if the reason for their Minnesota presence is solely “due to COVID-19.”

Dan Kidney is a director in Wipfli’s state and local tax practice and has more than 20 years of state and local tax (SALT) experience. You can reach him at dan.kidney@wipfli.com.