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Minnesota’s updated federal conformity has significant corporate income tax implications
January 2023
In brief
Enacted on January 12, H.F. 31 updates Minnesota’s definition of the Internal Revenue Code to mean the Code as amended through December 15, 2022. The update applies retroactively as of the same time Code changes were effective for federal purposes. Prior law conformed to the Code as amended through December 31, 2018.
Updated IRC conformity impacts corporate, individual, trust, estate and other taxpayers. Changes to the corporate income tax are summarized in this Insight, including:
- The creation of a Section 163(j) “delayed business interest” amount intended to allow taxpayers to benefit from the Section 163(j) CARES Act relief they would have received in the 2019 and 2020 tax years.
- The provision of several temporary additions and subtractions to decouple from certain federal items that Minnesota otherwise would adopt due to its updated IRC conformity.
Observation: Although not specifically addressed in the new law, updated retroactive conformity to the CARES Act may result in taxpayers receiving a benefit regarding depreciation expense associated with qualified improvement property (QIP). It appears that taxpayers may need to amend prior year returns to recognize the QIP benefit. The new law allows an extended statute of limitations for taxpayers filing amended returns for tax changes resulting from H.F. 31.
[H.F. 31 (1/12/23)]
In detail
Effective date – including retroactive applicability
H.F. 31 generally updates the state’s definition of “Internal Revenue Code” to mean the Code as amended through December 15, 2022. Prior law conformed to the Code as amended through December 31, 2018.
For corporate income tax purposes, the change is effective “the day following enactment [January 13, 2023], except the changes incorporated by federal changes are effective retroactively at the same time the changes were effective for federal purposes.”
Section 163(j) – CARES Act
Prior to H.F. 31, Minnesota conformed to 2017 tax reform legislation (TCJA) changes to IRC Section 163(j), which generally limits a taxpayer’s business interest expense to 30% of its adjusted taxable income (ATI). Enacted on March 27, 2020, the CARES Act increased the limit to 50% for the 2019 and 2020 tax years. Because Minnesota did not conform to IRC changes enacted after December 31, 2018, Minnesota taxpayers did not receive the CARES Act 50% ATI benefit for 2019 and 2020.
H.F. 31 updates conformity to the IRC and retroactively adopts the CARES Act changes. In addition, H.F. 31 provides a mechanism for a taxpayer to recognize its 2019 and 2020 CARES Act benefit.
Addition and subtraction modifications for the 2019 and 2020 tax years result in a taxpayer calculating a “delayed business interest” amount for each year. This amount is intended to equal the amount of CARES Act benefit a taxpayer would have received in 2019 and 2020. However, the benefit is delayed and carried forward into future years.
Observation: The intent appears to be that taxpayers would not have to amend 2019 and 2020 returns in order to reflect H.F. 31 changes to business interest expense. As provided by the January 3, 2023, Minnesota House Research Bill Summary, “[n]o amended returns would be allowed or required under this subtraction, as the retroactive portion would only maintain current nonconformity treatment of this deduction . . . .” The excess delayed business interest carryforward is “carried to the earliest taxable year.”
No subtraction for the “delayed business interest” is allowed for tax years beginning after December 31, 2022. The carryover amount remaining at the end of the 2022 tax year may be taken as a subtraction annually over a five-year period beginning with the tax year beginning after December 31, 2022.
Existing Mn. Stat. Sec. 290.34(5) provides that the Section 163(j) limitation must be aggregated between combined report entities consistent with the application to a consolidated group for federal income tax purposes. The H.F. 31 addition and subtraction noted above must be computed consistently with Sec. 290.34(5).
Observation: The language used for the addition and subtraction may be subject to interpretation and require guidance from the Department.
Observation: The bill language may raise questions. Section 14 of H.F. 31 amends Mn. Stat. Sec. 290.0134 (a corporate tax provision) to require application of the delayed business interest subtraction when “an addition is required under section 290.0131, subdivision 19.” Section 290.0131 relates to individuals, estates, and trusts. Section 14 of the bill may have borrowed language from Section 10 of H.F. 31, which involves the delayed business interest subtraction for individuals, estates and trusts. The summary above assumes that a technical correction or interpretation will provide that the corporate delayed business interest subtraction applies when the corporate addition modification above is required.
Temporary additions and subtractions
H.F. 31 implements modifications to reflect nonconformity to the following temporary provisions in federal law, which would otherwise be adopted as part of the IRC Code update:
- The limitation on the deductibility of wages used to claim the employee retention credit, which was originally enacted in the CARES Act.
- Increases in the gross income of a business that claimed the payroll credit for required sick leave, the payroll credit for required family leave, and the continuation coverage premium assistance credit. The sick and family leave credits were originally enacted in the CARES Act, and the premium assistance credit was enacted in the American Rescue Plan Act (enacted on March 11, 2021).
- Business meals deducted in excess of the 50% limitation. The limitation temporarily increased to 100% in the 2021 Consolidated Appropriations Act (enacted December 27, 2020) (CAA 2021), effective for tax years 2021 and 2022.
- For C corporations, charitable contributions deducted in excess of 10%, but not more than 25% of taxable income. The limitation was increased under the CARES Act and CAA 2021, effective for tax years 2020 and 2021.
Qualified improvement property
Prior to the TCJA, “qualified improvement property” (QIP) generally was treated as 15-year depreciable property that qualified for federal bonus depreciation. The TCJA removed QIP from the definition of bonus depreciation and did not include QIP as depreciable 15-year property under Section 168(e)(3)(E). Accordingly, following the TCJA, QIP was recoverable over 39 years rather than 15 years.
The CARES Act includes QIP as 15-year property under Section 168(e)(3)(E)(vii) and made the change effective as if it was enacted as part of the TCJA.
Observation: Although not expressly addressed in H.F. 31, retroactive adoption of the IRC suggests that Minnesota adopts the CARES Act change to QIP, which treats QIP as 15-year depreciable property applicable retroactively to the enactment of the TCJA (December 22, 2017). Given Minnesota’s extension of the statute of limitations noted below, taxpayers with significant QIP should consider whether to amend prior-year Minnesota corporate income tax returns to reflect the CARES Act retroactive depreciation change to QIP.
Extension of statute of limitations
A taxpayer whose tax liability changes as a result of H.F. 31 may file an amended return by December 31, 2023. The commissioner may review and assess the return of a taxpayer covered by this provision until the later of:
- the general applicable statute of limitations or
- one year from the time the amended return is filed as a result of a change in tax.
Interest on any additional liabilities as a result of any provision in this act accrue beginning on January 1, 2024.
Department of Revenue resources
The Department has posted several online resources addressing the impact of the updated conformity. At the time of publication, the following resources are available:
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