If you’re a Minnesota business owner, you may already be aware that the state’s elective Pass-Through Entity (PTE) tax expired at the end of 2025. However, another significant change is approaching. Minnesota resident individuals will no longer be able to claim a credit on their Minnesota personal tax return for elective PTE tax paid to other states. As a result, businesses need to reexamine their PTE elections in 2026 to avoid paying state tax twice on the same income, once to another state and again to Minnesota.
Pre-2026 Credit Mechanics
Historically, Minnesota allowed resident individuals to claim a credit on their state return for their share of elective PTE taxes paid to other states. This credit was particularly valuable, often providing a dollar-for-dollar offset against Minnesota tax liability. This was especially important because Minnesota residents are taxed on all income, regardless of the state in which it was earned, making the credit a key tool for avoiding double taxation on out-of-state income.
Why Is This Changing?
The expiration of this credit is directly linked to the federal state and local tax (SALT) deduction limitation introduced by the 2017 Tax Cuts and Jobs Act, which was originally in effect for tax years 2018 through 2025. In response to the SALT cap, many states, including Minnesota, implemented elective PTE taxes as a workaround, enabling business owners to continue deducting state taxes. Both the Minnesota PTE election and credit for elective PTE taxes paid to other states are available only while the federal SALT cap remains in place.
While federal law retained a SALT cap as part of the 2025 tax law changes, Minnesota does not automatically adopt federal tax law changes. Consequently, both the Minnesota PTE election and the credit for elective PTE tax paid to other states are set to expire for tax years beginning after December 31, 2025, aligning with the original expiration date of the federal law.
The Minnesota Legislature will need to pass legislation to extend the credit or update conformity to the latest federal SALT cap provisions. Until that happens, businesses will not be allowed to make a PTE election in Minnesota, and business owners will not be allowed a credit on their personal tax returns for PTE taxes paid to other states.
Consider Alternative Approaches in Other States
Following the discontinuation of the PTE tax credit, Minnesota business owners with operations outside the state should carefully assess whether making PTE elections in other jurisdictions will be advantageous for the 2026 tax year. Although the PTE election permits a federal deduction for state taxes, remitting tax to two states is typically less favorable than the savings generated by the federal deduction.
Instead of opting for a PTE election in other states, business owners may choose to file a personal return in those states or have the business make a composite election. Although these alternatives may provide only a limited federal deduction for state taxes paid, owners will still be eligible for a credit for these state taxes in 2026, thereby mitigating concerns about double taxation.
Key Takeaway for Minnesota Residents with Out-of-State Businesses
If you’re a Minnesota resident with business interests in other states, it’s important to plan ahead for these changes. The loss of the out-of-state PTE tax credit could significantly increase your Minnesota tax liability and affect your overall tax strategy.
Consider whether composite tax filings or individual nonresident returns in other states are appropriate for your situation and review your business structure and tax planning options now to avoid surprises when the law changes in 2026. Speak with your Copeland Buhl advisor about these options and how they impact your business or reach out by completing the Contact Us form.
