Section 179 expensing allows businesses to deduct the entire cost of certain equipment on their federal tax return in the year of purchase, instead of taking deductions for depreciation over a number of years. Purchases of most equipment and other personal property qualify for Section 179 expensing, including many leasehold improvements by businesses renting their facilities.

Under current law, Minnesota limits this expensing for the year of purchase to $25,000 (the amount in effect at the federal level in 2003) for a maximum of $200,000 in expenses. This amount is reduced dollar for dollar by the cost of property placed in service over $200,000.  If a business claims more in Section 179 expensing under the federal allowances than the $25,000/$200,000 Minnesota allowances, the business must add back 80 percent of the additional amount claimed to Minnesota taxable income on its Minnesota return, and then may subtract one-fifth of the amount added back in each of the next five tax years. In that way, the full amount claimed at the federal level is ultimately allowed at the state level.

Since 2003, Section 179 expensing limits have increased at the federal level. The 2017 federal Tax Cuts and Jobs Act (TCJA) amended the section 179 expensing rules to allow a deduction up to $1 million in qualifying property placed in service in a tax year, fully phasing out at $2.5 million. The TCJA also allowed other types of property to qualify for the deduction.

This bill would conform to the federal Section 179 expensing rules, beginning with placed in service in tax year 2018. For property placed in service before 2018, the current Minnesota approach would continue to apply and expensing would follow the five year add-back schedule until completed.

All provisions except section 7 are effective retroactively for tax years beginning after 2017.

Section 1. Internal Revenue Code. Provides that for purposes of the tax administration chapter, the Internal Revenue Code (IRC) amended as of December 16, 2016 applies for Minnesota income tax purposes except for section 179 expensing, for which the IRC as amended through December 27, 2017 applies.

Section 2. Composite returns. Corrects cross references for sections of law that are repealed in the bill for purposes of the composite returns filing requirement for nonresident partners, shareholders, and beneficiaries.

Section 3. Net income. Provides that for purposes of the definition of “net income” in the income tax chapter, the IRC amended as of December 16, 2016 applies for Minnesota income tax purposes except for section 179 expensing, for which the IRC as amended through December 27, 2017 applies.

Section 4. Internal Revenue Code. Provides that for purposes of references to the IRC in the income tax chapter, the IRC amended as of December 16, 2016 applies for Minnesota income tax purposes except for section 179 expensing, for which the IRC as amended through December 27, 2017 applies.

Section 5. Schedule of rates. Corrects cross references for sections of law that are repealed in the bill for purposes of income apportionment for nonresidents.

Section 6. Definitions. Corrects cross references for sections of law that are repealed in the bill for purposes of calculating AMT.

Section 7. Special provision. Adds a temporary provision to allow taxpayers who claimed a section 179 subtraction for tax years prior to 2018 to complete the five-year subtraction schedule repealed in section 8. Provides that all laws in Minnesota Statutes 2018 apply to the section 179 subtraction apply to the temporary provision. Effective the day following final enactment.

Section 8. Repealer. Repeals the add-back requirements and five-year subtraction schedule for section 179 expensing described above.