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On Jan. 12, 2023, Minnesota Gov. Tim Walz signed HF 31 into law. The
bill updates Minnesota’s conformity to the Internal Revenue Code
(Code) as of Dec. 15, 2022. Minnesota previously conformed to the
Code in effect on Dec. 31, 2018.
HF 31 adds specific decoupling provisions that ensure Minnesota
remains decoupled from certain Code sections enacted after 2018 but
which had retroactive effective dates for federal purposes.
Consequently, much of the new bill is clarifying, but not changing,
the haphazard conformity of the prior law. Some taxpayers may not
see a significant tax impact as a result of the changes, but other
taxpayers could be materially impacted due to retroactive
application of the changes and need to consider amended returns.
Conformity updates in detail
Business interest limitation
Minnesota has historically conformed to the federal business
interest limitation rules under section 163(j), as codified in the
Tax Cuts and Jobs Act (TCJA), which limit deductible interest
expense to 30% of adjusted taxable income (ATI). However, Minnesota
did not adopt the temporary changes made to section 163(j) by the
Coronavirus, Aid, Relief and Economic Security (CARES) Act, enacted
in 2020, which increased the limitation to 50% of ATI for tax years
2019 and 2020.
The bill provides that any amounts deducted under section 163(j) for
federal purposes related to the increase in the ATI limitation
enacted in the CARES act should be added to federal taxable income
in the computation of Minnesota taxable income. The addition
provisions are retroactive, intended to offset the update in the
general IRC conformity and maintain the state’s historical treatment
of the business interest expense limitation changes made by the
CARES Act.
Additionally, for each of the five taxable years beginning after
Dec. 31, 2022, taxpayers are allowed to subtract 20% of the total
interest expense additions required during the 2019 and 2020 tax
years, to the extent the additional carryforward has not already
otherwise been recovered through application of the section 163(j)
rules in tax years 2021 and 2022. This subtraction for “delayed
business interest” applies to tax years beginning after Dec. 31,
2022.
The Minnesota changes to required additions related to business
interest expense under the CARES Act as well as the associated
subtraction for delayed business interest apply to individuals,
estates, trusts, and corporations.
Delayed net operating loss subtractions
For federal purposes, the TCJA made several changes to the treatment
of net operating losses (NOLs), including eliminating carrybacks,
limiting utilization to 80% of taxable income and changing the
carryforward period for post-2017 NOLs to be indefinite. The CARES
Act temporarily removed the 80% limitation and allowed for NOLs
generated in 2018 through 2020 to be carried back for five years.
Minnesota previously decoupled from the changes to NOLs made under
the CARES Act.
Since Minnesota’s updated conformity date would technically include
the NOL changes enacted in CARES, the bill includes specific
provisions intended to clarify Minnesota’s NOL rules and maintain
the historical decoupling from these federal provisions. Minnesota
will continue to allow taxpayers to deduct NOLs up to a limit of 80%
of taxable income and to carry forward state NOLs for 20 years.
However, the state continues to decouple from the special federal
NOL carryback rules for losses generated in tax years 2018, 2019 and
2020, and does not allow NOL carrybacks.
Excess business losses
The TCJA enacted the excess business loss provisions of section 461,
limiting the amount of business losses noncorporate taxpayers may
use to offset nonbusiness income. The enactment of the CARES Act
delayed the effective date of those provisions to tax year 2021 for
federal purposes. HF 31 includes specific retroactive addition
modifications to preserve the historical treatment of excess
business losses for Minnesota purposes—losses allowed for federal
purposes under the CARES Act should have been added back in the
computation of Minnesota taxable income in prior years.
However, for tax years beginning in 2026, a subtraction is allowed
for any excess business losses that are limited for federal
purposes, effectively decoupling Minnesota from the federal
provisions for 2026 and beyond.
https://rsmus.com/insights/tax-alerts/2023/Minnesota-passes-tax- conformity-bill.html
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