Minnesota’s New Pass-through Entity Tax – A SALT Cap Workaround for Business Owners

September 16, 2021 by Staff
Tax Services

The 2017 Tax Cuts and Jobs Act (TCJA) limited the itemized deduction for state and local taxes (SALT) to $10,000.  Many states enacted laws to work around this limitation and support business owners by allowing the business to pay and deduct the tax.  Minnesota has now enacted its own Pass-Through Entity (PTE) Tax, effective for tax years beginning after 12/31/2020. 

The Minnesota PTE Tax allows qualified businesses to pay the state tax on their partnership or S corporation return.  The tax is calculated at the highest rate of 9.85%.  The owners then include the business income on their personal tax returns and take a credit for their share of the tax paid by the business. 

Business owners will pay the same amount of Minnesota tax with or without the PTE election.  The only difference is whether it is paid by the business or personally.  The advantage of the PTE election is that the full amount of Minnesota tax is deductible for federal purposes, effectively bypassing the $10,000 limitation. 

To elect to pay the PTE tax and get the benefit of a larger federal tax deduction, the PTE must meet a series of qualifications.  The election is also binding on all owners.

Contact your Copeland Buhl representative to discuss whether your business is eligible to make this election.