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S.F. No. 304 - Allowing pass-through entities to file as C corporations (as proposed to be amended by the A-3)
 
Author: Senator Ann H. Rest
 
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
 
Date: March 12, 2019



 

For pass-through businesses (LLCs, partnerships, and S corporations,), income tax is imposed on the members, partners, or shareholders at the individual level, while C corporations pay corporate franchise tax at the entity level. This bill establishes an election for pass-through entities to file as C corporations for Minnesota tax purposes, effective beginning in tax year 2019.

The effect of the election is that the business’s income is taxed at the entity level for state purposes. Individual members, partners, and shareholders would pay state individual income tax on their share of income received from the qualifying entity, but would subtract income received from the qualifying entity for purposes of calculating federal taxable income. A qualifying entity would also claim a credit against Minnesota income tax for taxes paid to another state on its composite return. At the federal level, a qualifying entity could subtract its Minnesota taxes paid, resulting in reduced net income for the business. This reduced amount is then apportioned among members, partners, and shareholders based on their interest in the business.

Section 1. Election to file as a C-corporation. Authorizes the election for a qualifying entity (partnerships, LLCs, or S corporations) to file as a “C-option corporation.” The election may be made only by those with a more than 50 percent interest in the qualifying entity and is binding on all who have an ownership interest in the qualifying entity. A partner’s, member’s, or shareholder’s adjusted basis in the qualifying entity must be as though the C-option election was not made.

Section 2. Subtractions; income of partners, members, or shareholders. Authorizes a subtraction for purposes of calculating Minnesota taxable income. The subtraction equals net income received by a member, partner, or shareholder from a qualifying entity for purposes of calculating federal taxable income (FTI) when a qualifying entity has elected to file as a C-option corporation.

Section 3. Schedules of rates. Adds a reference for the subtraction under section 2 for purposes of the income apportionment formula.

Section 4. Credit for taxes paid to another state. Authorizes a qualifying entity electing to file as a C-option corporation to claim a credit for tax paid to another state on its composite return.

Section 5. Definitions; alternative minimum taxable income. Adds a reference to the subtraction in section 2 for purposes of calculating AMT.

Section 6. Withholding by partnerships. Exempts partnerships from withholding requirements under current law if the partnership has elected to be taxed as a C-option corporation.

Section 7. Withholding by S corporations. Exempts S corporations from withholding requirements under current law if the S corporation has elected to be taxed as a C-option corporation.

 

 

 
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