Overview of Minnesota’s Response to Federal Tax Reform
Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).
HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota.
Repatriation Tax Provisions
Under this bill, foreign earnings deemed repatriated under IRC section 965 seem to be included in the Minnesota state tax base; however, Minnesota’s current law provides for a dividend-received deduction that would likely apply to the foreign earnings deemed repatriated if such foreign earnings are considered “dividends” for purposes of the deduction. Minn. Stat. § 290.21. The Minnesota statutes do not explicitly provide that such deduction applies to Subpart F income, however, in 2017 legislation was introduced that would have provided that the dividend-received deduction would not apply to income included in taxable income under IRC section 951 (HF 893 and SF 726). That legislation has not passed or seen any legislative movement in over a year. Thus, the legislative history suggests that Subpart F income, including the foreign earnings deemed repatriated under IRC section 965, could be eligible for Minnesota’s dividend-received deduction.
The bill would provide an addback to the state tax base for the federal deduction under IRC section 965(c), which is the federal deduction used to provide for the reduced effective federal tax rate on foreign earnings deemed repatriated. The bill would provide that for taxpayers that elect to pay the federal tax resulting from inclusion of deemed repatriated foreign earnings in federal taxable income in installments under IRC section 965(h), the addition to the state tax base for the IRC section 965(c) deduction would be applied ratably to the same tax periods and using the same percentages that are used to determine the payments of federal tax under IRC section 965(h). This addback would be effective for tax years beginning on or after January 1, 2017. The current law also has an addback for IRC section 965 deductions (referring to the pre-tax reform 965); that addback would be removed under the bill effective for tax years beginning on or after January 1, 2017.
Currently, the Minnesota law provides an addback for special deductions taken under sections 241 through 247 of the IRC. This bill would allow the federal deduction for the foreign-source portion of dividends received from specified 10 percent owned foreign corporations in IRC section 245A to the extent that the amount was deemed repatriated and included in federal taxable income (and the starting point for the Minnesota tax base) under IRC section 965.
Net Operating Losses
The current MN law provides that “[t]here shall be allowed as a deduction for the taxable year the amount of any net operating loss deduction as provided in section 172 of the Internal Revenue Code, subject to the limitations and modifications provided in this section.” The bill would specifically decouple from the 80 percent net operating loss limitation in IRC section 172(a)(2).
SF 2529 was introduced in the Senate on February 22, 2018. This bill would provide conformity to the IRC as of September 29, 2017, thus, not conforming to the provisions of the Tax Cuts and Jobs Act. However, the bill would explicitly conform to certain provisions of the Tax Cuts and Jobs Act, including the expensing provisions under IRC section 168(k) and section 179.
SF 2982/HF 3995
SF 2982 was introduced in the Senate on March 5, 2018. A companion bill (HF 3995) was subsequently introduced in the House on March 19, 2018. This legislation would provide conformity to the IRC as of December 23, 2017, including for corporate taxpayers, effective for tax years beginning January 1, 2018. The effective date of the conformity with the IRC provided in this legislation indicates that the federal provisions providing for the deemed repatriated foreign earnings (IRC § 965) would not have state tax implications in Minnesota.
Net Operating Losses
The legislation would effectively decouple from the 80 percent net operating loss limitations in IRC section 172(a)(2). In computing the state tax base, the legislation would provide a subtraction from federal taxable income for the difference between the amount of net operating losses allowed as a deduction under the former IRC section 172 and the amount of net operating losses allowed as a deduction in the same taxable year under current IRC section 172.
HF 3656/SF 3162
HF 3656 was introduced in the House on March 12, 2018. A companion bill (SF 3162) was introduced in the Senate on the same day. This legislation would provide conformity to the IRC as of December 23, 2017, but not for corporate filers (for which conformity with the IRC remains December 16, 2016). Thus, the legislation would not adopt the provisions of the TCJA for corporate filers.
Governor’s Budget Bill
Last week, Minnesota Governor Mark Dayton released his list of tax priorities which we expect will be addressed in his budget bill. Among them are coupling with the interest expense deduction limitations in IRC section 163(j) and coupling with the expensing provisions in IRC section 168(k). The governor also indicates that he will address Minnesota’s treatment of the deemed repatriated foreign earnings. More to come once the governor’s bill is released.