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H.F. No. 2 - Federal Conformity, First Engrossment
 
Author: Senator Roger C. Chamberlain
 
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
 
Date: January 9, 2017



 

This bill conforms Minnesota individual income and corporate franchise tax codes to changes made at the federal level, with provisions effective retroactively to 2015 where applicable.

Section

Provision

1

Adopts references to the federal administrative provisions made between December 31, 2014, and November 15, 2016, referenced in the state tax administration chapter in Minnesota Statutes. 
 

2

Adopts changes to federal taxable income made in the Internal Revenue Code (IRC), except for extension of bonus depreciation. The provisions are retroactive to when they became effective for federal purposes and are described below. 

The Slain Officer Family Support Act (2015) allows deductions made by Minnesota taxpayers for families of certain slain officers to flow through to their 2014 state returns. Without this change, taxpayers deducting contributions for the families of the officers on their 2014 federal returns would be required to add those contributions to Minnesota taxable income on their 2014 state returns and then deduct them from Minnesota taxable income on their 2015 state returns.

The Don’t Tax Our Fallen Public Safety Heroes Act (2015) provides that excluded federal or state benefits paid to surviving dependents of a public safety officer killed in the line of duty also apply to state benefits that were payable without regard to whether the officer’s death was in the line of duty.

The Bipartisan Budget Act of 2015 clarified the treatment of partnership interest created by gift and changed partnership audit rules.

The Protecting Americans from Tax Hikes Act of 2015 (PATH); Consolidated Appropriations Act of 2016 for purposes of calculating federal taxable income, created new provisions and modified and/or extended existing provisions.  Changes include:

  • Exclusion of compensation paid to individuals who were wrongfully incarcerated from gross income; effective retroactively for all tax years;
  • Rollover from employer-sponsored retirement plans and traditional IRAs into SIMPLE (savings incentive match plan for employees) IRAs following the end of the two-year period that started when the employee first participated in the SIMPLE IRA.
  • Allowance of contributions to agricultural research organizations claimed under the itemized deduction for charitable contributions;
  • Clarification of valuation rules for charitable remainder unitrusts;
  • Ineligibility of REITs to participate in tax-free spinoffs;
  • Exclusion from gross income clean coal power grants for non-corporate taxpayers; grant recipients must reduce the basis of any property acquired using the grant; and
  • Prohibition of the transfer of losses from tax indifferent parties.

Modifications to existing provisions:

  • Expands the definition of qualified higher education expenses that can be paid for with distributions from section 529 college savings plans to include the purchase of computers and related equipment. Also includes a new rule exempting from tax refunds from a higher education institution of amounts paid with a 529 distribution if the amount of the refund is recontributed to the plan within 60 days; 
  • Extension of the exclusion from gross income for qualified scholarships to apply to payments resulting from required participation in a comprehensive work-learning-service program at a work college;
  • Allowance of the excise tax on high-cost employer-sponsored health coverage to be claimed as an itemized deduction (the imposition of the excise tax is delayed to 2020).
  • Extension of the exclusion of reimbursements of medical expenses of a deceased employee’s beneficiary who is not a surviving spouse or dependent under age 27 to apply to distributions from medical trusts (limited to certain governmental health plans); and
  • Allowance of ABLE (Achieving a Better Life Experience) accounts for a designated beneficiary to be opened in states other than the state of residency of the beneficiary.

Provisions extended to tax years 2015 and 2016 or otherwise as indicated:

  • Deduction in adjusted gross income for up to $4,000 of qualified tuition and related expenses;
  • Exclusion for discharge of indebtedness income on principal residence;
  • Itemized deduction for mortgage insurance premiums on a principal residence;
  • Bonus depreciation, extended at 50 percent to tax years 2015 to 2017, 40 percent in tax year 2018, and 30 percent in tax year 2019 (Under the bill, Minnesota would not conform to the extension of bonus depreciation, but would retain its current law requirement that taxpayers 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 tax years.);
  • Classification of certain racehorses as 3-year property;
  • First-year 50 percent bonus depreciation and alternative minimum depreciation adjustment exemption for qualified second generation biofuel plant property;
  • Allowed depreciation of certain motorsports entertainment complex property over 7 years;
  • Allowed expensing of 50 percent of the cost of advanced mine safety equipment;
  • Allowed accelerated depreciation of qualified Indian reservation property;
  • Allowed expensing for the first $15 million of production costs of films and television shows;
  • Increased section 179D deduction for energy efficient commercial buildings; and
  • Accelerated depreciation for second generation biofuel plant property.

Provisions made permanent:

  • Deduction in adjusted gross income of up to $250 for classroom or professional development expenses paid by a K-12 grade educator;
  • Increased limitation on valuation of qualified conservation contributions of appreciated real property;
  • Increased limit on federal adjusted gross income on amount of qualified conservation easements that may be deducted as a charitable deduction;
  • Increased section 179 expensing amount and phaseout threshold for tax year 2015 to $500,000 and $2,000,000; with the increased amounts indexed for inflation beginning in 2016 (Minnesota would not conform to this provision but would require the 80 percent addback for the first year and 20 percent subtraction for the following five years as under current law);
  • For taxpayers 70 ½ years of age or older, exclusion from gross income up to $100,000 of IRA distributions made directly to charitable organizations (the amount excluded is not allowed as a charitable deduction);
  • Parity in allowable deduction for employer-provided transit expenses with employer-provided parking expenses;
  • Enhanced deduction for donations of food inventory;
  • Deduction for energy efficient commercial building property;
  • Allowed depreciation of leasehold improvements and qualified restaurant property, including new restaurant property and improvements to retail property over 15 years;
  • Extension of basis adjustment to S corporation stock when the S corporation donates appreciated property, which is equal to the tax basis of the property rather than the fair market value;
  • Increased exclusion for gain from the sale of qualified small business stock sold by an individual from 50 percent to 100 percent for original issue C corporation stock. The exclusion applies to certain stock purchased in businesses with less than $50 million of assets that is held for at least five years;
  • Preferential treatment of dividends of regulated investment companies;
  • Exclusion of active financing income from the definition of Subpart F income for U.S. shareholders with at least ten percent interest in a controlled foreign corporation;
  • Extension of the special rule limiting payments from controlled subsidiaries of tax-exempt organizations that are subject to the unrelated business income tax to the amount in excess of allowable payments under arm’s length transactions rules, only if a binding written contract between the entities was in effect on August 17, 2006;
  • Reduction in the minimum holding period for built-in gains on sales of assets of S corporations that converted from C corporations from ten years to five years so that S corporations can sell assets held more than five years without being taxed on built-in gains; and
  • Extension of the date to make rollovers to IRAs of payments in previous bankruptcy cases (including Delta Airlines) and to file federal tax claims in response to a law expanding the number of individuals eligible to make rollovers.

The United States Appreciation for Olympians and Paralympians Act (2016) excludes from gross income the value of any Olympic or Paralympic medal or prize money received from the United States Olympic Committee for competing in the Olympic or Paralympic Games, for any medals or prizes awarded after December 31, 2015. The exclusion is limited to taxpayers with $1 million or less in adjusted gross income ($500,000 for married separate filers).

The 21st Century Cures Act exempts certain health reimbursement arrangements offered by small employers from the minimum coverage requirements for group health plans under the Affordable Care Act.

The Combat-Injured Veterans Tax Fairness of Act of 2016 extends the statute of limitations for certain veterans to file amended returns. The Department of Defense improperly withheld income tax on severance pay to service members who were discharged due to combat-related injuries, although those payments are not taxable. The Act allows those veterans to file amended federal returns to claim refunds of the withheld amounts within one year of being notified by the Department of Defense.
 

3

Updates other references to federal adjusted gross income in the IRC that are used for calculating alternative minimum tax and withholding on wages. This definition is also used as the starting point for calculating household income for purposes of the K-12 and dependent care credits.
 

4

Provides that the state’s treatment of section 179 expensing for individuals applies to heating and air conditioning equipment, a change to federal 179 expensing beginning in tax year 2016.
 

5

Provides that the state’s treatment of section 179 expensing for corporation applies to heating and air conditioning equipment, a change to federal 179 expensing beginning in tax year 2016.
 

 6

Increases the income levels at which the working family credit begins to phase out for married joint filers. The amount is increased by the same amount allowed at the federal level. Under current state law, the threshold amount is increased by $5,000, adjusted for inflation for tax years 2013 to 2017. Federal law made the $5,000 threshold amount permanent for the earned income tax credit. This section adopts that federal change so that the threshold amount for the working family credit matches the federal threshold amount for 2018 and subsequent tax years. 
 

7

Updates the reference to the IRC for purposes of determining household income for the property tax refund.
 

8

Updates the reference to the IRC in the estate tax chapter. There were no substantive changes made to calculation of the estate tax.
 

9

Allows an extension to file amended returns for individuals who became eligible to make retroactive IRA rollovers under a 2012 federal act, or who received compensation for wrongful incarceration, and extends the filing deadline for individuals whose taxes were improperly withheld from tax exempt combat-related severance payments. 
 

10

Prohibits the commissioner from increasing the amount due from or decreasing the amount of refund to individuals income taxpayers for tax year 2015 if the amount due was understated or the refund was overstated due to tax calculations made prior to the changes under this bill.

 
 
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