On May 30, 2019, Governor Tim Walz signed a tax bill that retroactively couples Minnesota tax law to federal law following the Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017. Passed by the Minnesota legislature during a short special session, this law will impact both individuals and businesses. Remember, your federal income tax returns are not affected by these changes, so any adjustments will only impact your Minnesota returns.
Reason for Conformity
The starting point for Minnesota individual and business tax returns is tied to the federal tax return. For some items, such as bonus depreciation, Minnesota has decided to vary from federal treatment, requiring addbacks or subtractions to account for these variances. Because Minnesota tax law does not automatically change with federal tax law, state conformity updates have generally been needed when federal tax legislation like the TCJA occurs. Minnesota previously conformed to the Internal Revenue Code in effect on December 31, 2016. With this new law, the conformity date has been extended to December 31, 2018.
Although the changes to the law are retroactive, individual filers have a "special adjustment" for 2018 that effectively eliminates most of the retroactivity.
Income Tax Starting Point
For tax years following 2018, the starting point for computing Minnesota income tax is changed to federal adjusted gross income (FAGI) from federal taxable income (FTI). This means that itemized and standard deductions and personal/dependent exemptions can be determined by Minnesota law without regard to future changes in federal tax law. Estates, trusts, and C-corporations will continue to use FTI.
Personal and Dependent Exemptions
Beginning with the 2019 tax year, the Minnesota personal exemption has been eliminated for filers and spouses. A state dependent exemption has been created in the amount of $4,250 for 2019. This represents the amount under federal law prior to the TCJA, which eliminated all personal exemptions for federal purposes.
Standard and Itemized Deductions
For 2019, the state standard deduction matches the federal amount and some separate Minnesota itemized deductions have been established, keeping several items that were eliminated under federal law. For 2018 and forward, taxpayers may elect the federal standard deduction but still itemize on their Minnesota returns.
Major changes for businesses include:
- Limiting the business interest deduction to 30% of adjusted taxable income
- Section 179 increasing to $1 million, same as federal, but keeping the 80% addback with subsequent subtractions over five years
- Expanding bonus depreciation but keeping the 80% addback rules
- Minnesota will not allow the qualified business income (QBI) deduction, which is provided under federal law
Filed and Extended Returns
Many taxpayers have already filed their 2018 returns but many have been extended. Minnesota Revenue would prefer that 2018 returns not be filed at this time, while they update their computer systems to account for the changes to 2018 tax law. However, due to the fast-approaching extended due dates, we have decided to file returns where we can clearly reflect the changes.
Tax preparers have been advised not to file amended returns related to conformity rule changes. Guidance from Minnesota Revenue indicates the state will adjust previously filed returns. These state-initiated changes may generate taxpayer refunds or assessments. If the Department requires more information to compute changes then taxpayers will receive a letter with such requests. If you receive correspondence related to requests or changes to your returns, please forward it to your Boulay tax advisor.
Boulay Can Help
In the coming days and weeks more guidance will become available to help determine the next steps for individuals and businesses, and Boulay will be staying on top of these developments.
To learn more, contact a Boulay advisor at 952.893.9320 or firstname.lastname@example.org to learn more about how these changes may impact your Minnesota returns.