When the Federal government passed the Tax Cuts and Jobs Act of 2017 (TCJA) it created many changes in the tax code. Just about every state has a different set of tax laws. States are not required to conform or pass the same tax laws as the federal government. Up until just recently, Minnesota had not taken any action to conform to the TCJA changes. This meant that for the 2018 tax year, we were essentially operating under two sets of tax laws in Minnesota. On May 30, 2019 Governor Walz signed an omnibus tax law bill (H.F.5) addressing this issue and providing some conformity with the Federal tax laws. This article gives a summary of the changes and impacts to Minnesota taxpayers.
Impact on Individual Taxpayers
In general, H.F.5 is a win for most taxpayers. It is estimated to lower individual income taxes by more than $530 million during fiscal year 202021. This is primarily accomplished by increasing the standard deduction to match the new Federal standard deduction (effective 2019). Another significant change is the starting point for calculating Minnesota Taxable Income. The starting point was Federal Taxable Income (FTI), which has been changed to Federal Adjusted Gross Income (AGI). H.F.5 also made the $4,250 per-dependent exemption permanent, while eliminating all personal exemptions.
There were several other changes made under H.F.5 that will have a smaller impact on Minnesota taxpayers. These include an expansion of the working family credit and reducing the second-tier tax rate from 7.05% to 6.8% (Minnesota has a tiered tax system like the IRS tax system).
Impact on Business Owners
Unlike the benefits most individual taxpayers will receive from H.F.5, most Minnesota business owners will see an increase in taxes due to the bill. In fiscal year 2020-21 the bill is expected to raise revenue up to $730 million from Minnesota businesses. This is accomplished primarily from three changes.
First, with the change in starting point of calculating Minnesota taxable income from FTI to AGI, Minnesota continues its nonconformity with the Qualified Business Income Deduction (QBI) under IRC Section 199A. This benefit realized by business owners at the Federal level does not exist in Minnesota.
Second, Minnesota does now conform with the cap on the net interest expense deduction under IRC 163(j). This essentially limits how much interest expense a business can deduct, depending on a variety of circumstances.
Finally, H.F.5 now has Minnesota conforming with the Federal tax code on the deductibility of net operating losses (NOL) carryforwards. For losses arising in tax years 2018 and beyond, the net operating loss deduction is now limited to 80% of taxable income.
One positive change to businesses as a result of H.F.5 is the new law now conforms to the type of property that qualifies for Section 179 expensing. This benefit is deminimized by Minnesota requiring that 80% of Section 179 and bonus depreciation be added back and amortized over the following five tax years.
Do I Need to Amend My Minnesota Tax Return?
Most of the changes made by H.F.5 are retroactive to the passing of the TCJA and are effective for tax year 2018. While the conformity does bring some much-needed simplicity, it is complicated by the fact that many individual and business taxpayers had already filed their 2018 tax return.
The DOR website offers some guidance on this issue. New forms have been published and can be used for those that have not filed yet. If you have filed your 2018 tax return, the DOR will automatically make the adjustments for you. They have a timeline of completing this by Summer 2020. New 2019 tax forms are expected to be completed by the opening of the 2019 tax filing season.