HOW DOES IT WORK?
Pass-Through Entities (a fancy term for partnerships and S-Corps that don’t normally pay their own income tax or PTE for short below) can now elect to pay their own Minnesota income tax, deduct it as a federal business expense and then "pass-through" a refundable credit to each shareholder/partner to offset state taxes on their personal returns. Tax is calculated at 9.85% of company profits. For many, this is higher than your personal tax rate but the credit is fully refundable, so in the end, the amount of tax paid to the state is exactly the same. For 2022, we can plan ahead to pay the proper amount via payroll and estimates but for this year, it was hard to plan ahead for this change happening late in the year, so it may mean overpaying and then getting a refund.
WHY IS THIS JUST COMING UP NOW?
Late last year, the IRS published a notice confirming that state tax would be deductible on federal pass-through entity tax returns (just like on giant publicly traded corporations). Slowly many states began to create laws to allow their state tax to be paid by these entities. Minnesota just passed a law in July making this possible starting in 2021, sent us FAQs in September and then finally published draft forms in October to show us tax nerds how to actually make the election and garner the added deduction.
WHAT DO YOU NEED TO DO?
You need to make an Estimated Tax Payment to MN during the calendar year in which you would like to deduct the taxes paid, making this a great reason to do some Year End Tax Planning to determine the optimal timing for your business. Estimates of either "Partnership Tax" or "S Corp Tax" are made online using the e-services log in on the MN Revenue website. Any payment made to the state will be a current year federal tax deduction based on the date paid. We'd love to discuss whether you should make this payment in 2021 or wait until 2022. It's also a really good idea to file your corporate/partnership tax returns on time by March 15th in order to make sure there isn't any added interest on company taxes owed (in the past it didn't matter as PTEs didn't owe any of their own taxes!).
We would LOVE to do some year end tax planning if you have your bookkeeping up to date. Seeing as this new deduction could save you up to $3500 per $100,000 in profits, it could be very valuable to plan ahead AND file early in the New Year.
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