Minnesota legislature passes conformity bill to align state with Federal tax code

Authored by: Sarah Hopkins

On Jan. 13, the Minnesota House and Senate passed legislation retroactively conforming Minnesota’s individual income tax and corporate franchise tax to federal changes enacted since Dec. 31, 2014 for tax year 2015 and following years.

The State issued a notice on Thursday, Jan. 19 requesting taxpayers not make any changes to past filings at this time. The Department of Revenue (DOR) has stated they will review 2015 income tax returns and do one of the following:

  • DOR will make the necessary changes to your return: A letter explaining changes will be sent and a refund will be issued.
  • DOR will request (via letter) additional information from you and make necessary changes to your return: A letter explaining changes will be sent and a refund will be issued.
  • If DOR is unable to make the necessary changes to your return, you will be notified via letter that you need to amend your filing to receive the benefits of the changes.

The DOR is requesting taxpayers not amend filings for these new deductions or exclusions unless notified via letter.

Individual taxpayers that filed their 2015 returns based on state law as it existed prior to this legislation will not see an increase in their 2015 tax liability as a result of the changes.

What the conformity bill does not change

Minnesota did not conform to the extension of bonus depreciation, but rather retains its current law requirement. Taxpayers should continue to add back to taxable income 80 percent of the increased depreciation amount in the first tax year and then subtract one-fifth of the amount added back in each of the five following years. In addition, federal Section 179 expensing was not implemented.

What the conformity bill does change

Adoption of the federal definition of taxable income (excluding the extension of bonus depreciation) to include:

  • Clarify treatment of partnership interested created by gift (Bipartisan Budget Act of 2015)
  • Adopt changes included in the Protecting Americans from Tax Hikes of 2015 (PATH):
    • Retroactive exclusion of compensation to individuals wrongfully incarcerated from gross income. Amended returns must be filed by Sept. 1, 2017
    • Allow rollovers into SIMPLE IRAs for employer-sponsored retirement plans and traditional IRAs following the two-year period starting when employee first participated
    • Permit charitable contributions for donations to agricultural research organizations
    • Clarify valuation rules for charitable remainder unitrusts
    • Make Real Estate Investment Trusts (REITs) ineligible for tax-free spinoffs
    • Exclude clean coal power grants from gross income for non-corporate taxpayers (already allowed for corporate taxpayers)
    • Prohibit transfer of losses from tax indifferent parties
    • Expand qualified higher education definition, change calculation method, and addresses refund taxability
    • Exclude required work-learning-service program income at a work college
    • Address deduction for excise tax on high-cost employer sponsored health coverage
    • Extend the exclusion for deceased employee beneficiaries’ reimbursement for medical expenses to distributions from medical trusts
    • Allow opening of Achieving a Better Life Experience (ABLE) accounts for beneficiaries in states other than that of residency
    • Extend other provisions; including a higher education tuition expense deduction, an exclusion for discharges of indebtedness of principal residences from gross income, an increased deduction under Section 179 for energy efficient commercial buildings, as well as various depreciation and expensing provisions for racehorses, motorsports complexes, mine safety equipment, Indian reservation business property, qualified film and television production expenses, and second generation biofuel plant property
    • Make permanent provisions including; the deduction up to $250 for classroom expenses and professional development for educators, an increased charitable deduction amount for donations of qualified conservation easements, opportunity for persons aged 70 ½ and above for an exclusion up to $100,000 for donations to qualified charities from a traditional or Roth IRA, enhanced charitable deduction for food inventory for pass-through entities, limitation on basis adjustments in S corporation stock when appreciated property is donated, adjusted depreciation allowance for leasehold and restaurant improvements, rule limiting payment amounts subject to unrelated business income tax from controlled subsidiaries to parent exempt organizations under certain conditions, as well as favorable treatment for dividends paid to certain foreign shareholders of a regulated investment company. Also included is an allowance to defer recognition of active income not distributed to certain U.S. shareholders of banking, financing and similar foreign corporations, as well as the 100 percent exclusion for the gain on sales of qualified small business stock acquired after Sept. 27, 2010 and held for more than five years. It also reduces the holding period for built-in gain avoidance from ten years to five for asset sales of S corporations that converted from C corporations
    • Increase airline employees’ eligibility to make rollovers to IRAs of payments in prior bankruptcy cases was addressed. Those affected by this change will have until Sept. 1, 2017 to file amended returns
  • Exclude medals and/or prize money received from competing in Olympic or Paralympic games after Dec. 31, 2015 from gross income for filers under adjusted gross income amounts (The U.S. Appreciation for Olympians and Paralympians Act)
  • Adopt the 21st Century Cures Act which exempts businesses with fewer than 50 full-time employees from penalties under the Affordable Care Act when they provide employees with health reimbursement accounts that do not meet minimum coverage 
    • Veterans who received combat-related severance payments from the Department of Defense which improperly withheld taxes will have until Dec. 31, 2018 to file amended state returns. The Secretary of Defense is required to notify those affected
  • Update Minnesota statutes for income and franchise tax for references to the Internal Revenue Code to adopt federal changes to federal adjusted gross income which impacts individual alternative minimum tax and wage withholding. This also impacts calculations affecting dependent and education credits
  • Conform, effective for tax year 2016, the state’s tax treatment of 179 expensing of heating and air conditioning equipment to the federal rules for individuals and corporations
  • Increase the level at which the working family credit begins to phase-out for married joint filers
  • Adopt the federal changes which impact property tax refunds prospectively. Changes are effective for refunds based on rent paid in 2016 and property taxes payable in 2017
  • Allow the deduction of contributions for supporting families of New York Police Department detectives to be taken on the 2014 return (Slain Office Family Support Act of 2015)
  • Clarify that exclusion of benefits paid to surviving dependents of a killed public safety officer apply without regard to if the officer’s death was in the line of duty (Don’t Tax Our Fallen Public Safety Heroes Act)

Unless effective dates are specifically addressed, these changes are mostly retroactive to the federal effective date.

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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.