Following the surprising, but well-received passing of an early federal tax conformity bill last month by the Minnesota Legislature that was swiftly signed into law by Gov. Tim Walz, there were, naturally, lots of questions about what this meant for tax preparers, businesses and individuals.

MNCPA member Dan Kidney, CPA, JD, a director of state and local tax at Wipfli LLP, was quick to dig into the new law and share with MNCPA members, along with MNCPA director of government relations Geno Fragnito, pertinent information to know during a webinar a few weeks back. Even over the course of a nearly two-hour webinar with time for Q&A, there were dozens of questions that attendees still had.

As usual with Dan, his kindness shone through and he made himself available to review unanswered questions, following up with an email to attendees. In the following, you will find selected questions from that exchange, which are edited for length and clarity. This post is not exhaustive and certainly doesn’t cover the core of material that was covered during the webinar.

Before we start, though, a disclaimer from Wipfli LLP, Dan’s firm: The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Wipfli LLP to the reader. The reader is also cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should consult his or her tax professional prior to taking any action based upon this information. Wipfli LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

1) Minnesota still remains out of federal conformity for 100% meals deduction, correct?

Correct. Minnesota is still nonconforming to the 100% deductibility of business meals at a restaurant for tax years 2021–22, and still requires an addback for those years to restore the 50% deductibility level. 

2) Are you saying the Minnesota Main Street COVID relief grant from DEED is nontaxable even though taxable for federal?

According to FAQ #4.13 of DEED’s webpage here, “Generally, yes [the amount of the grant] would be considered [federal] taxable income.” These amounts should also be taxable for Minnesota income tax purposes, as a result of its general conformity to the federal definition of taxable income. Minnesota’s newfound nontaxable treatment of SBA loans, EIDL loans, Restaurant Revitalization Grants and Small Venue Operator Grants is caused solely because of the 2023 Minnesota tax law (2023 HF 31) because of Internal Revenue Code provisions targeting those specific programs. I am not aware of any specific Code provisions targeting Minnesota Main Street COVID Relief grants, which is why I believe they are taxable (at both the Minnesota and federal levels).  

3) If we amend the Minnesota S Corporation return for the Restaurant Revitalization Grant and PTE tax goes down, do we need to amend the federal return for that year to reduce the state tax if using the accrual method and report to the state refund as federal income in the year refund received for cash basis?

For guidance about the federal income tax implications of state PTE tax elections generally, please see the Nov. 1, 2022, article in The Tax Adviser about this topic here. Among other topics, the article discusses the following topic: “If a state income tax refund is received, is it considered federal gross income in the following year?” According to the author of that article, this question “remains unanswered” by IRS Notice 2020-75, and the IRS has not responded to either of the requests for clarification that the AICPA has sent (on Oct. 26, 2021, and again on Oct. 4, 2022) As a result, the exact federal income tax treatment of these refunds does not appear to have a settled answer.

4) Is there any guidance for taxpayers whose gross receipts are not subject to income tax in other states due to Public Law 86-272 in regard to the PTE tax? Since they are not truly Minnesota gross receipts, would we use only Minnesota sales or would we throwback those sales to Minnesota?

Minnesota has not had a “throwback” rule for sales apportionment purposes for many years (since approximately 1987). Minnesota also does not require that a business have nexus in another state in order to have the right to use Minnesota’s allocation and apportionment rules. See Minn. Stat. 290.17 Subd. 3(a). As a result, under current Minnesota tax law, I would only use revenue from sales sourced to Minnesota, and not sales sourced to other states where a taxpayer lacks nexus exceeding Public Law 86-272 protection.

5) Is there a reason they won't adjust automatically, given that the information they need is all on Schedule NC?

It is unclear why the Legislature has chosen not to have Revenue do automatic adjustments for these retroactive nonconformity items, which Revenue has done twice in recent years (2019 and 2021).

6) Are the ERC refunds still nontaxable for Minnesota and, therefore, an adjustment from the federal return?

Minnesota is still nonconforming to the provisions of the Internal Revenue Code that disallow a deduction for wage expenses that were claimed under the Employee Retention Credit. In other words, Minnesota still has, as it has always had, a subtraction modification for these wages.

7) If a pass-through entity added back the Shuttered Venue Operator Grant money, is it to amend its return or do the individual owners amend their returns? This is confusing if amended KPI or KS are not to be amended distributed to the owners.

The only situation where Revenue is instructing partnerships/S Corporations to not issue amended Schedules KPI or KS for 2021 is when those entities (1) made a PTE Tax election for 2021 and (2) had a net decrease to their Minnesota-source income as a result of the 2023 Minnesota federal tax conformity law. I do not know how the owners of these entities are expected to know that they need to amend their 2021 Minnesota return (e.g., 2021 Form M1), in light of the facts that (1) that they will not be getting a 2021 amended Schedule KS or KPI, (2) they are likely not tax experts, and (3) the preparer who works on the partnership/S Corporation return may not be the same person who works on the owner’s return. For these reasons, I recommend asking Revenue this question at TaxLawChanges@state.mn.us.

8) Is there not a difference between a 2021 federal EBL and Minnesota EBL due to wages being allowed for MN EBL calculation and now if conforming to federal the Minnesota EBL is the same and wouldn't we need to amend 2021 for the EBL difference as the EBL carryforward to 2022 is now the same for federal and Minnesota in regard to the wages.

Great question! It is true that Minnesota/federal nonconformity adjustments affected the Minnesota EBL calculation (adjustments on Schedule M1NC lines 4, 10 to 12, or 15-25 M1NC were carried to line 9 of Schedule M1LOSS for 2021 and 2022). The Minnesota/federal difference from ERC wages was among these M1NC line items (i.e., lines 11 and 12). However, because the Minnesota conformity to Employee Retention Credit (ERC) wages was the same both before and after this 2023 MN tax law change (i.e., MN doesn’t conform to the federal treatment), this ERC wage issue should not cause any change in the calculation of a Minnesota Excess Business Loss. That being said, retroactive conformity changes that affect the M1NC lines (the ones that changed were M1NC lines 4, 10, 15, 17, and 19-24) would affect the 2021 M1LOSS calculation. Because I don’t have access to the old 2021 M1NC instructions, however, I can’t advise what adjustments those lines were for.

9) 2% or greater S shareholder has health premium excluded at federal tax but does Minnesota exclude or subtract from taxable income and, if so, how is it being handled today?

With respect to the federal premium assistance credit, Minnesota still does not conform to the provision of the Internal Revenue Code that disallows a deduction for wages claimed under that credit. As a result, Minnesota still (as it did prior to this 2023 Minnesota tax law change) requires a subtraction modification for those wages.

10) If a pass-through entity who paid PTE tax has a big refund from an amended return, can the entity get the refund or are refunds only given to the individual partners/shareholders?

On the 2021 Form M3, for example, the PTE Tax is reported on Line 2, and the amount of that Line 2 tax is a (refundable) credit to partners (reported to them on Sch. KPI line 30, claimed by them on Sch. M1REF line 9). To the extent that the PTE had an overpayment on its 2021 return , such as PTE tax payments in excess of its actual 2021 PTE Tax liability, the excess was considered an overpayment (2021 Form M3 line 19), which the partnership could elect to (1) refund the overpayment to itself (2021 Form M3 line 21) or (2) apply the overpayment to its’ 2022 estimated taxes (2021 Form M3 line 20). This same choice is available on an amended return (see 2021 Form M3X). The only limitation on this default outcome applies when a refund of PTE Tax credits has already been issued to a partner/shareholder. In that case, the electing PTE is not entitled to a refund (e.g., 2021 Form M3 line 21). Said differently, a refund cannot be issued to both the pass-through entity and its owner for the same amounts (as this would be “double-dipping.”) See new Minn. Stat. 289A.08 Subd. 7a(k) (2023).

11) In 2021, our software added a form that showed ERC as a deduction in calculation of Minnesota NOL. There was no such form in 2020. Do we potentially have Minnesota NOLs for 2020 as a result of the ERC subtraction?