June 3, 2019 — On Friday, May 31st, Governor Tim Walz signed into law Minnesota’s response to the federal Tax Cuts and Jobs Act (TCJA). House bill No 5 lays out these changes. Minnesota adopted many of the changes made to the Internal Revenue Code, with several exceptions. Some of the changes are retroactive to 2018, but others start in 2019. The Minnesota Department of Revenue is currently reviewing the Bill and you should not file amended returns or take any action at this time. The information below is intended to provide a high-level quick summary based on the information we have at this time, with more information to come as it becomes available. Below is a summary of some of the changes.
Individuals/Estates/Trusts
Effective for taxable years beginning after December 31, 2017:
- Section 199A deduction is added back for Minnesota purposes for estates and trusts;
- Business losses used to offset other income are limited in the year created to $500k married, $250k others;
- Net operating loss deductions must not exceed 80% of taxable income in a single year;
- Net operating losses prior to 2018 are not subject to the 80% limit;
- Global intangible low-taxed income (GILTI) – subtraction for individual income tax; and
- Deferred foreign income—amount recognized under section 965 of the Internal Revenue Code is subtracted for Minnesota purposes. (Effective retroactively to 2017)
Effective for taxable years beginning after December 31, 2018:
- Starting point for calculating individual income tax changed from federal taxable income to federal adjusted gross income;
- Estates and trusts will continue to use federal taxable income as the starting point for determining Minnesota taxable income;
- The tax rate for the second tier income tax bracket decreased from 7.05% to 6.80%. The fourth tier bracket starts at a lower taxable income amount;
- Dependent exemption retained, personal exemption eliminated. Phase-outs at certain income levels;
- Standard deduction for 2019 changed to match federal law of $24,400 for married couples filing a joint return, $12,200 for singles, and $18,350 for heads of households;
- Itemized deductions follow federal with some modifications;
- Tax paid deduction limited to $10k or $5k for married filing a separate return (follows federal);
- Charitable contributions increased to 60% of adjusted gross income (follows federal);
- Mortgage interest deduction limited to $750k of indebtedness or $375k for married filing a separate return (follows federal);
- Medical expenses in excess of 10% of adjusted gross income (follows federal);
- Unreimbursed employee expenses–deduction allowed for amounts in excess of 2% of adjusted gross income. (does not follow federal);
- Personal casualty and theft losses follow the old federal rule, not limited to losses in a disaster area; and
- Minnesota uses the existing formula to limit itemized deduction, except state taxes are no longer subject to this limitation.
- Charitable contributions deduction for non-itemizers—equal to 50% of the excess of charitable contributions over $500;
- Definition of married for tax purposes follows federal law.
Businesses
Effective for taxable years beginning after December 31, 2017:
- Starting point for calculating C corporation taxable income will continue to be federal taxable income;
- Section 179 expensing increased to $1 million, with 20% of this amount allowed in the year placed in service and the remaining 80% deducted over the next 5 years;
- Bonus depreciation expanded with 20% of this amount allowed in the year placed in service and the remaining 80% deducted over the next 5 years;
- Business interest deduction limited to 30% of adjusted taxable income;
- Cash method allowed for businesses with average annual gross receipts under $25 million;
- Net operating loss deductions must not exceed 80% of taxable income in a single year. Net operating losses prior to 2018 are not subject to the 80% limit;
- C Corporation AMT will continue to apply for Minnesota purposes;
- Deferred foreign income—amount recognized under section 965 of the Internal Revenue Code is subtracted for Minnesota purposes (effective following date of enactment);
- Foreign-derived intangible income—added back to the extent deducted under section 250 of the Internal Revenue Code;
- Global intangible low-taxed income (GILTI)—subtraction to the extent included in income under section 951A of the Internal Revenue Code.
Effective for taxable years beginning after December 31, 2018:
- Angel credit—investment threshold lowered from $10,000 to $7,500 for qualified investments in greater Minnesota, veteran, minority, or women-owned businesses (Effective in 2021). $10 million was allocated for tax year 2021.
These changes may impact your 2018 and future Minnesota tax returns at both a business and individual level, so it’s important to speak with your tax advisor to understand what these changes mean for you.