This bill makes numerous changes to the individual income and corporate franchise tax chapter in response to the changes to the federal tax code made in the Disaster Tax Relief and Airport and Airway Extension Act in September 2017, the Tax Cuts and Jobs Act (TCJA) in December 2017, the Bipartisan Budget Act in February 2018, and the Consolidated Appropriations Act in March 2018.

The provisions in this bill are mostly a result of the changes made to the calculation of federal taxable income (FTI) in TCJA. Minnesota currently references federal taxable income (FTI) as its starting point and incorporates federal deductions and exemptions. Changes to those deductions and exemptions therefore affect the calculation of Minnesota taxable income. This bill decouples the calculation of Minnesota taxable income from FTI and instead uses federal adjusted gross income (FAGI) as the starting point for individual taxpayers.

The TCJA limited or repealed many federal itemized deductions. This bill retains most of those deductions by reference to a previous version of the Internal Revenue Code (IRC), including:

• property taxes;
• retained limitation on deduction for home mortgage indebtedness;
• theft and casualty losses;
• moving expenses; and
• unreimbursed employee expenses.

The bill also establishes a state standard deduction at the same amount allowed prior to TCJA. The TCJA repealed personal and dependent exemptions; this bill establishes Minnesota personal and dependent exemptions at the same amount allowed prior to TCJA.

The TCJA also increased the amount and phaseout thresholds for section 179 expensing and bonus depreciation. Minnesota would conform to those increased amounts but would retain its 80% addback schedule for bonus depreciation. Minnesota would not adopt the 20% deduction for pass-through income that was included in TCJA.

The TCJA-related provisions are generally effective beginning in tax year 2019 (one year after most TCJA provisions were effective). Other provisions are effective retroactively for tax year 2017, including tax treatment of charitable contributions and certain early retirement account withdrawals made as a result of hurricane disasters that year, and treatment of deferred foreign income that was subject to tax under TCJA for tax year 2017. Other changes applicable to tax year 2017 include tax extenders that have been enacted on a year-to-year or otherwise shorter-term basis at the federal level, such as exclusion of forgiveness of indebtedness on a principal residence, subtraction for tuition and related expenses, and various business expensing provisions.

Section 1. Internal Revenue Code. Updates the reference to the IRC in the administrative chapter. Effective beginning in tax year 2019.

Section 2. Generally; individuals. Requires the commissioner of revenue to determine the income levels at which individuals are required to file a tax return. Currently, individuals must file a return if they are required to file a federal return. This section provides that individuals must file a return if they are required to file a federal return or if they are so required under the income thresholds determined by the commissioner. Effective beginning in tax year 2019.

Section 3. Composite income tax returns for nonresident partners, shareholders, and beneficiaries. Modifies a cross-reference to reflect changes to other references in the article. Effective beginning in tax year 2019.

Section 4. Reporting exempt interest and exempt-interest dividends. Modifies the reference from FTI to FAGI for purposes of reporting exempt interest and interest-exempt dividends. Effective beginning in tax year 2019.

Section 5. Assessments on returns. Modifies the reference from FTI to FAGI for purposes of the commissioner’s authority to audit and adjust returns. Effective beginning in tax year 2019.

Section 6. Surviving spouse. Creates a definition of surviving spouse, referencing the federal definition, for purposes of calculations made under new provisions in the article. A surviving spouse is an unmarried individual whose spouse died in one of the two preceding tax years and who maintains a separate household. Effective beginning in tax year 2019.

Section 7. Net income. Specifies that the current definition of “net income” – which means federal taxable income – applies to corporations, estates, and trusts, as the calculation of taxable income for these entities is not modified from current law. Specifies that “net income” for individuals means FAGI, as modified with Minnesota additions and subtractions. Updates the IRC reference date for purposes of the definition. Effective the day following final enactment, and changes incorporated by federal changes are effective at the same time as effective for federal purposes. Establishing FAGI as the starting point for individuals is effective beginning in tax year 2019.

Section 8. Adjusted gross income; federal adjusted gross income. Codifies the definition of “adjusted gross income” and “federal adjusted gross income” to reference the federal definition. The definition incorporates federal changes made through the date in section 7. Effective the day following final enactment.

Section 9. Taxable net income. Modifies the definition of taxable net income to reflect the new deductions and exemptions established in a later section. Effective beginning in tax year 2019.

Section 10. State itemized deduction. Modifies the definition of “state itemized deduction” to adopt federal itemized deductions effective prior to TCJA, except that the TCJA provision to lower all the floor for the medical expenses deduction from 10% to 7.5% of FAGI for tax years 2017 and 2018 would be allowed. The federal deduction for state income and sales taxes is also excluded, as it is no longer relevant given the new state itemized deduction. This section also establishes that private mortgage insurance (PMI) is a state itemized deduction (PMI was disallowed under TCJA as an expense that could be included as part of the federal home mortgage interest deduction). Effective beginning in tax year 2019.

Section 11. State standard deduction. Codifies a state standard deduction to reflect the pre-TCJA federal standard deduction amounts. The deduction amounts are adjusted by chained CPI. Effective beginning in tax year 2019.

Section 12. Internal Revenue Code. Updates the reference to the IRC in the income and corporate franchise chapter to reflect changes made by TCJA, except where otherwise specified. Effective the day following final enactment and applies to the tax years incorporated by federal changes, including any retroactive provisions.

Section 13. Definition; scope. Provides that additions to Minnesota taxable income are specific to estates and trusts, as individuals will apply Minnesota additions to FAGI. The additions apply to amounts excluded from calculating federal taxable income for trusts and estates, and FAGI for individuals. Effective beginning in tax year 2019.

Section 14. Income, sales and use, motor vehicle sales, or excise taxes paid. Provides that only trusts and estates must add back state income, sales, and other local taxes that were deducted for federal purposes. Individuals will not have to add these taxes back given the transition to FAGI as the starting point for calculating state tax liability. Effective beginning in tax year 2019.

Section 15. Section 179 expensing. Conforms to the increased section 179 federal expensing amounts for income tax purposes – up to $1,000,000 may be expensed, and the phaseout threshold was increased to $2,500,000. Minnesota taxpayers will now be able to expense the full eligible amount in a single tax year beginning in 2020 instead of the five-year expensing schedule under current law.

Section 16. Disallowed itemized deduction. Provides for the phaseout of Minnesota itemized deductions to be consistent with how the phaseout was calculated prior to TCJA. Effective beginning in tax year 2019.   

Section 17. Disallowed personal exemption amount. Applies the phaseout of personal exemptions to the new Minnesota personal and dependent exemption subtraction established in a later section. Effective beginning in tax year 2019.

Section 18. Qualified business income addition. Requires that trusts and estates add back the 20% of pass-through income deducted under TCJA for purposes of calculating Minnesota taxable income. Effective beginning in tax year 2019.

Section 19. Foreign-derived intangible income. Requires an addition of foreign derived intangible income (FDII), which is a deduction for purposes of calculating federal taxable income on certain foreign-sourced income. Effective beginning in tax year 2019.

Section 20. Definition; scope. Provides that subtractions from Minnesota taxable income are specific to estates and trusts, as individuals will apply Minnesota additions to FAGI. The subtractions apply to amounts excluded from calculating federal taxable income for trusts and estates, and FAGI for individuals. Effective beginning in tax year 2019.

Section 21. Charitable contributions for taxpayers who do not itemize. Provides that taxpayers may continue to use the existing subtraction for taxpayers who do not itemize under the new state itemized deduction. The amount of qualified charitable distributions from an IRA may not count toward the amount calculated in the subtraction (as under current law). Effective beginning in tax year 2019.

Section 22. Personal and dependent exemption. Provides a subtraction for the new state personal and dependent exemption, which is established in a later section. Effective beginning in tax year 2019.

Section 23. Military service pension; retirement pay. Corrects the reference for the military pension subtraction to reflect the shift to FAGI as the starting point for calculating Minnesota taxable income. Effective beginning in tax year 2019.

Section 24. Social Security benefits. Updates the subtraction and income threshold amounts for 2018 dollars and provides that the subtraction amount for married separate filers is one-half the amount for married joint filers, effective beginning in tax year 2019. Also provides a phased-in subtraction for a percentage of Social Security benefits beginning in tax year 2020.

Section 25. Moving expenses. Provides a state subtraction for moving expenses, which were disallowed as an above the line federal deduction under TJCA. Effective beginning in tax year 2019.

Section 26. Global intangible low-taxed income. Provides a subtraction for certain foreign source earnings subject to taxed under TCJA. Global intangible low-taxed income (GILTI) is income that exceeds 10% of a controlled foreign corporation’s fixed assets that are depreciable as trade or business assets. Effective beginning in tax year 2019.

Section 27. Deferred foreign income. Provides a subtraction for foreign-source income that was not subject to tax prior to TCJA, the extent it was included in federal adjusted gross income. Under TCJA, this income is “deemed” repatriated and thus subject to tax. Effective for tax years 2017 to 2019.

Section 28. Standard or itemized deduction. Provides a subtraction for the amount of the state standard or itemized deduction, which are defined in an earlier section. Effective beginning in tax year 2019.

Section 29. Tuition subtraction. Allows a subtraction for the amount of the federal deduction for tuition and related expenses (up to $4,000 per year) that has been allowed under federal law as an above-the-line deduction. The subtraction was included as part of the Bipartisan Budget Act tax extenders, but is set to expire after 2017. Effective beginning in tax year 2019.

Section 30. Section 179 expensing. Conforms to the increased section 179 federal expensing amounts for corporate franchise tax purposes – up to $1,000,000 may be expensed, and the phaseout threshold was increased to $2,500,000. Minnesota taxpayers will now be able to expense the full eligible amount in a single tax year beginning in 2020 instead of the five-year expensing schedule under current law.

Section 31. Foreign-derived intangible income. Provides a subtraction for corporations for certain foreign source earnings included in federal adjusted gross income and subject to tax under TCJA. Foreign derived intangible income (FDII) is income from intangible assets (such as patents and trademarks) that U.S.-based companies earn from servicing foreign markets. Effective beginning in tax year 2019.

Section 32. Global intangible low-taxed income. Provides a subtraction for corporations for certain foreign source earnings subject to taxed under TCJA. Global intangible low-taxed income (GILTI) is income that exceeds 10% of a controlled foreign corporation’s fixed assets that are depreciable as trade or business assets. Effective beginning in tax year 2019.

Section 33. Deferred foreign income. Provides a subtraction for corporations for foreign-source income that was not subject to tax prior to TCJA, the extent it was included in federal adjusted gross income. Under TCJA, this income is “deemed” repatriated and thus subject to tax. Effective for tax years 2017 to 2019.

Section 34. Personal and dependent exemptions. Allows a personal and dependent exemption in the amount allowed prior to enactment of the TCJA. Provides for chained Consumer Price Index for Urban Consumers (C-CPI-U) adjustments for the deductions. The TCJA modified the method by which inflation is measured from traditional CPI-U to C-CPI-U. Effective beginning in tax year 2019.

Section 35. Schedules of rates for individuals, estates, and trusts. Updates the income thresholds for 2018 and reduces the first-tier income tax rate from 5.35% to 5.05%. Corrects cross-references for purposes of calculating tax liability for nonresidents. Effective beginning in tax year 2019.

Section 36. Inflation adjustment of brackets. Provides for C-CPI-U adjustments for the individual income tax brackets. Effective beginning in tax year 2019.

Sections 37 and 38. Definitions; credit. Update the reference in the long term care credit to refer to Minnesota instead of federal itemized deductions. Effective beginning in tax year 2019.

Sections 39 to 42. Credit for certified historic structure rehabilitation. Update the Minnesota credit to reflect changes made in TCJA to pay the credit or grant over five taxable years instead of the single year the structure was placed in service. Effective for applications for allocation certificates submitted after December 31, 2018.

Section 43. Subtraction. Modifies the income reference from FTI to FAGI for the elderly and disabled subtraction. Effective beginning in tax year 2019.

Section 44. Standard or itemized deduction. Allows an individual to claim the state standard deduction or state itemized deduction. Married separate filers must claim the same type of deduction. Allows a subtraction for the state standard or state itemized deduction. Effective beginning in tax year 2019.

Section 45. Definitions. Amends the Minnesota AMT calculation to require the Minnesota addition of qualified business income deducted at the federal level (commonly known as the 20% pass-through income deduction). Modifies the income calculation reference from FTI to FAGI. Allows the amount allowed to be deducted for casualty losses prior to TCJA to be included in the Minnesota AMT deduction. Effective beginning in tax year 2019.

Section 46. Computation and modifications. Provides that the limitation under TCJA to allow corporations to claim 80% of net operating losses (NOLs) does not apply to the calculation of NOLs for Minnesota corporate filers. Effective beginning in tax year 2019.

Section 47. Income not derived from conduct of a trade or business. Updates the definition of “wages” to correspond to a new clause of the IRC that requires wage withholding on certain stock option elections that were not available prior to TCJA. Effective beginning in tax year 2019.

Section 48. Dividends received from another corporation. Disallows a dividend-received deduction for dividends paid from stock that is debt-financed, which is disallowed under the IRC. Effective beginning in tax year 2019.

Section 49. Insurance companies; computation of limit on interest expense. Provides that section 163(j) interest limitation for corporations that are part of an affiliated group of companies that include insurance companies (exempt from corporate franchise tax because they pay premium tax) are to be computed by including the insurance company’s income in determining how the limit applies. This parallels the federal treatment, which imposes the corporate income tax on insurance companies. Effective beginning in tax year 2019.

Section 50. Wages. Amends the definition of wages subject to Minnesota withholding to correspond to a new IRC provision that requires federal withholding on certain stock option elections. Effective beginning in tax year 2019.

Section 51. Income. Modifies the calculation of income for purposes of the property tax refund to reflect the repeal of the domestic production deduction under TCJA and specifies that alimony received by the claimant and not already taxed must be included in the calculation. Provides a definition of “exemption amount” that reflects what the personal and dependent exemption would have been had TCJA not been enacted. The exemption amount is adjusted for C-CPI-U. Moves other definitions to a new clause. Effective beginning in tax year 2019.

Section 52. Gross rent. Updates the gross rent amounts for purposes of the property tax refund for nursing homes, foster care homes, and intermediate care facilities for 2018 and converts indexing to C-CPI-U. Effective beginning in tax year 2019.

Section 53. Internal Revenue Code. Updates the reference to the IRC for purposes of the property tax refund. Effective for refunds based on property taxes payable after December 31, 2019, and rent paid after December 31, 2018.

Section 54. Homestead credit refund. Updates the income thresholds and refund amounts for the homeowners PTR for 2018. Effective for refunds based on property taxes paid after December 31, 2018.

Section 55. Renters refund. Updates the income thresholds and refund amounts for the renters PTR for 2018. Effective for refunds based on rent paid after December 31, 2017.

Section 56. Inflation adjustment. Moves to C-CPI-U indexing for the property tax refund schedules. Effective for refunds based on property taxes paid after December 31, 2018 and on rent paid after December 31, 2017.

Section 57. Scope. Updates the reference to the IRC for purposes of the estate tax chapter. Effective for estates of decedents dying after December 31, 2018.

Section 58. Sale of property used in a trade or business. Provides a past-date IRC reference for purposes of the sales tax exemption for like-kind exchanges. Under TCJA, like-kind treatment for personal property is no longer allowed. Effective retroactively for sales and purchases made after December 31, 2018.

Section 59. Exemptions. Provides a past-date IRC reference for purposes of the motor vehicle sales tax exemption for like-kind exchanges. Under TCJA, like-kind treatment for personal property is no longer allowed. Effective retroactively for sales and purchases made after December 31, 2018.

Sections 60 and 61. Subtraction; Addition. Update the reference for the first-time homebuyer savings account from FTI to FAGI. Effective beginning in tax year 2019.

Section 62. Application. Updates the reference in the JOBZ chapter from FTI to FAGI. Effective beginning in tax year 2019.

Section 65. Repealer. Repeals provisions obsolete with the transition from FTI to FAGI, effective beginning in tax year 2019:

• Addition for fines, fees, and penalties for individuals, which is now included in federal income;
• addition for domestic production activities for individuals;
• addition for domestic production activities for corporations;
• addition for fines, fees, and penalties for corporations, which is now included in federal income; and

disallowance of trade or business expenses for fines, fees, and penalties, which were disallowed under TCJA.