Minnesota’s Pass-Through Entity (“PTE”) tax enables an entity to electively pay taxes on behalf of its partners, members, or shareholders. This election is available for tax years starting after December 31, 2020.
With the introduction of H.F. 1938, effective for tax years beginning after December 31, 2022, there are several modifications to the PTE tax. Notably, the definition of a “qualifying entity” now encompasses a limited liability company (“LLC”) that is taxed as a partnership or S corporation. Furthermore, a qualifying entity must have at least one “qualifying owner,” which has been expanded to include a disregarded entity with a qualifying owner as its sole owner.
Prior to H.F. 1938, the qualification of an LLC for the PTE tax lacked specific guidance on the tax treatment type of the LLC. H.F. 1938 clarifies that a qualifying LLC, taxed as a partnership or S corporation, can make the PTE election. Additionally, the expanded definition of “qualifying entity” allows more entities to be eligible for the PTE tax. For example, if a qualifying entity has a corporation or partnership as one of its owners, it may qualify as long as it has at least one other “qualifying owner.”
Furthermore, starting from tax years commencing after December 31, 2022, H.F. 1938 introduces allocation distinctions between resident and nonresident owners:
- The income of a resident owner in a qualified partnership or LLC taxed as a partnership is not subject to allocation outside of Minnesota.
- The income of a resident owner in an S corporation or qualified subchapter S subsidiary is subject to allocation treatment.
Previously, a resident owner of a multistate PTE only received the benefit of PTE taxation on their apportioned share of income. This amendment aims to put Minnesota residents on a more equitable footing with residents of other states that have PTE taxes, as it allows Minnesotans to have their entire share of partnership income taxed at the PTE.
Overall, these changes in Minnesota’s PTE tax landscape have expanded eligibility criteria, clarified tax treatment for LLCs, and introduced allocation distinctions for resident and nonresident owners.