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S.F. No. 2436 - Federal conformity
 
Author: Senator Ann H. Rest
 
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
 
Date: March 30, 2016



 

This bill conforms Minnesota individual income and corporate franchise tax law to most changes made at the federal level.  The bill would apply retroactively to tax year 2015.  The bill also establishes a procedure to conform to federal changes made after the legislative session ends and that apply to a tax year that ends before the next regular legislative session begins. 

Section

Provision

1

Adopts references to the federal administrative provisions made between December 31, 2014, and December 31, 2015, referenced in the administrative chapter in Minnesota Statutes.  Effective retroactively to tax year 2015. 
 

2

Adopts most changes to the Internal Revenue Code (IRC) made at the federal level to federal taxable income, retroactive to when they became effective for federal purposes.  The federal provisions are described below. 

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 detectives 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.

Don’t Tax Our Fallen Public Safety Heroes Act (2015) – 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.

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

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; 
  • 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% 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% of the cost of advanced mine safety equipment;
  • Allowed accelerated depreciation of qualified Indian reservation property; and
  • Allowed expensing for the first $15 million of production costs of films and television shows;

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 section 179 expensing amount and phaseout threshold for tax year 2015 to $500,000 and $2 million; with the increased amounts indexed for inflation beginning in 2016;
  • 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 for 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% to 100% 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;
  • 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

3; 5

Conforms to increased section 179 expensing amounts enacted for tax year 2015 and following years.
 

4; 6

Replaces the section 179 expensing subtraction with a reference to the subtraction and carryover in another section. Also strikes the subtraction for qualified transportation fringe benefits, which was made permanent at the federal level.
 

7

Adopts federal changes to federal adjusted gross income used for computing individual alternative minimum tax and determining withholding on wages.
 

8

 

Establishes an ongoing method to conform to federal tax law changes by administrative action in specified circumstances.  The conformity would extend only for the year the tax year that ends before the regular legislative session begins. 

To offset the revenue loss resulting from conformity, $20 million from the general fund would be set aside in a federal tax conformity account.  The account is automatically refilled to the $20 million level as money in the account is used to offset revenue loss.  Provides a list of eligible federal tax preferences for purposes of the proposed administrative conformity.

Directs the commissioner of revenue to adopt the eligible federal tax provisions by administrative action for the designated tax year, provided the federal tax conformity account has funds sufficient to cover the revenue loss.  Provides a list of priorities the commissioner must use in determining whether there is sufficient funding for a conformity provision. The qualifying provisions must be published on the Department’s website.  Requires the commissioner to prepare forms to reflect the conformity provisions for the tax year, as well as to submit draft legislation for any ongoing federal provisions. 
 

9

Makes permanent the increased income level at which the working family credit begins to phase out for married joint filers. 
 

10

Effective beginning in tax year 2015, allows subtractions related to section 179 expensing in excess of taxable income to be carried over for up to ten tax years, and maintains the current law subtraction for amounts added to taxable income in previous years.
 

11

Strikes a cross-reference to the transportation fringe benefit subtraction for purposes of calculating alternative minimum tax, which is obsolete given the permanent federal extension.
 

12

Adopts the federal changes that affect household income for purposes of the property tax refund.
 

13

Updates the reference to the Internal Revenue Code for purposes of estate tax. 
 

14

Prohibits the commissioner from increasing the amount due from or decreasing the amount of refund to individual income taxpayers for tax year 2015 if the amount due was understated or the refund was overstated due to tax calculations based on the 2014 Internal Revenue Code instead of the 2015 Code (conformed to in this bill).
 

15

Extends the time for filing amended returns to September 1, 2016, if the 3½ year time limit on amending returns to make claims for refunds in statute has expired for individuals who became eligible to make retroactive IRA rollovers under federal amendments to the Federal Aviation Administration Modernization and Reform Act or received compensation for wrongful incarceration.

 

 
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