Foreign disregarded entities

Foreign disregarded entities

Authored by Sarah Hopkins

Minnesota recently changed its policy recognizing income from foreign disregarded entities when they are owned by a U.S. corporation and the entity has elected to be treated as a disregarded entity for federal income taxes for tax years 1997-2012.

This change comes as a response to the recent Minnesota Supreme Court decision in Ashland Inc. v. Commissioner of Revenue.

Previously, Minnesota would not recognize the election made by a foreign entity with a single C corporation owner and did not permit the new income or apportionment factors of the foreign entity to be included in a combined report.

Additional information on the Minnesota Department of Revenue’s earlier policy is detailed in Minnesota Revenue Notice 98-08. As a reminder, this policy was in effect for tax years 1997-2012; a modification to the law in 2013 changed this earlier policy for years 2013 and later.

In light of the recent Ashland decision, Minnesota’s policy for tax years 1997-2012 was retroactively overruled and taxpayers filing or amending affected years must include the income and apportionment factors of all foreign disregarded entities.

Corporate franchise taxpayers who filed a Minnesota return for these tax years, which excluded such foreign income, may be entitled to a refund of taxes paid, owe additional tax or may have an adjustment to net operating loss carry forwards for these periods.

The Minnesota Department of Revenue stated that it will not assess penalties on additional tax amounts as a result of this decision. 

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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