New Minnesota Tax Laws Allows LLCs To Elect To Deduct At Entity Level
New Minnesota Tax Credit Available for Business Owners
As of July 1, 2021, Minnesota owners of a pass-through entity may elect to be taxed at the entity level, which could reduce their federal tax liability. Minnesota limited liability companies (LLCs), partnerships, and S corporations have typically been treated as pass-through entities, so that the individual owners are taxed on the profits, not the entity itself. But, because the federal tax code now limits the deduction for state and local taxes paid at $10,000, many individuals paying more than $10,000 are no longer getting the benefit of deducting all the state and local taxes on their federal tax returns. So, electing to be taxed at the entity level may offer some tax savings for some individuals.
Key Features of the New Law
- Applies to partnerships, limited liability companies, or S corporations that elect to be taxed at the entity level
- Excludes entities which have a partnership, limited liability company other than a disregarded entity, or corporation as a partner, member, or shareholder
- Qualifying owners may be resident or non-resident individuals, estates, or trusts
- Available for the 2021 tax year and after
- A Minnesota taxpayer who has a tax liability in another state can get a Minnesota tax credit for the amount paid in the other state
- Electing pass-through entities are no longer required to withhold tax for nonresident partners or shareholders, but will have to pay quarterly estimated taxes
- Qualifying owners of electing entities can claim a credit on their individual income tax return equal to the amount of the owner’s share of the pass-through tax liability
- The owner may receive a refund for any credits equal to their individual state income tax liability
What Should Businesses Do?
If it seems like the Minnesota tax credit will be a net benefit, the owners should review the entity’s current governing documents with their lawyer to confirm that they are able to make the necessary changes to take advantage of this new law. Depending on how the governing documents were structured, they may need to be revised. Additionally, electing to tax the entity is binding on all qualifying owners and is irrevocable for that tax year, so owners must confirm that they have the proper legal authority to make the election.
To take advantage of the new law, a company and its qualifying owners will have to elect to pay entity level tax in Minnesota before filing their company’s tax return. Contact us with any questions about this new law.
¹ See S.F. 263 and Minn. Stat. § 289A.08 (as amended)
² See IRC Section 164(b)(6)