On May 24, 2023, a tax bill was signed that will potentially have significant tax advantages to business owners.
Minnesota’s PTE tax allows pass-through entities to pay tax on behalf of the owners. The PTE election allows the pass-through entity to deduct the Minnesota taxes on their federal tax return. In most cases, if these Minnesota taxes were paid by the owners, they would not be deductible due to the $10,000 State and Local Tax limitation on their individual income tax returns.
The significant changes to PTE tax for tax years beginning after December 31, 2022 include:
- Pass-through entities can now elect to pay PTE tax for qualifying owners. For tax years beginning prior to January 1, 2023, an entity was unable to elect PTE if there was a non-qualifying owner.
- For owners of entities that are taxed as partnerships, 100% of a Minnesota resident partner’s distributive share of income is included in the PTE calculation.
- Owners of entities that are taxed as S corporations and non-resident members of partnerships are unaffected by the 2023 change and only include apportioned Minnesota taxable income in the PTE calculation.
- Clarifies that PTE taxes paid to another state may qualify for the Minnesota Credit for Taxes Paid to Another State.
This expansion to Minnesota’s PTE tax provides planning opportunities for business owners to reduce overall taxes paid.