Minnesota Tax Law: Key Business Changes and Next Steps

Minnesota’s omnibus tax bill (H.F. 2438) is now law, bringing significant changes that could shape how businesses approach tax planning and compliance.

Minnesota does not automatically conform to federal tax laws, so the state must intentionally decide whether to adopt those provisions, reject them entirely, or conform only in part. This legislation extends the state’s pass-through entity tax (PTET) election and updates Minnesota’s tax code to match most of the recent federal changes from the One Big Beautiful Bill Act (OBBBA).

Learn how these changes may simplify some areas of tax compliance and offer new tax savings opportunities — but selective conformity means careful planning is still needed.

2026 Minnesota tax law change highlights

The legislation conforms Minnesota to the Internal Revenue Code as amended through May 1, 2026. Minnesota has retroactively adopted most federal OBBBA changes, with the same effective dates.

Notably, Minnesota now provides expanded Section 163(j) limits on business interest expense and expanded Section 179 limits from $1 million to $2.5 million, along with updates on the following provisions.

Minnesota pass-through entity tax (PTET) extended through 2027

Minnesota’s PTET — the elective state tax that allows S corporations and partnerships to bypass the $40,000 federal state and local tax (SALT) deduction cap — is now extended through tax year 2027.

Pass-through business owners can continue using the PTET election in 2026 and 2027 by electing to pay state income tax at the entity level. The extension is retroactive to January 1, 2026. In addition, the individual resident credit for PTET paid to other states by the passthrough entity is similarly extended.

Because the extension became law after the first 2026 estimated tax deadline, the state is waiving underpayment penalties on first-quarter 2026 PTET estimates (provided it’s paid in full at the same time the second installment is made). This one-time grace period gives PTET electors a chance to catch up without penalty.

Get details on Minnesota’s PTET election and whether it may be right for your business.

Retroactive 100% bonus conformity creates new opportunities for larger deductions

Minnesota now offers the same 100% bonus depreciation on eligible assets as the federal government. With the new federal conformity, any qualifying asset placed in service after January 19, 2025, can qualify for 100% bonus depreciation for Minnesota tax purposes.

Previously, Minnesota was operating on pre-2025 tax rules, which only allowed for 40% bonus depreciation and required taxpayers to add back and depreciate 60% of the federal deduction.

While Minnesota has now adopted the federal 100% bonus rate, the state still requires businesses to add back 80% of the bonus deduction; this addback can then be subtracted ratably (20% each year) over the next five years.

Section 174 conformity in Minnesota: R&E expensing explained

Minnesota’s 2026 tax law moves the state closer to current federal law for Section 174A, but not uniformly.

This new law updates the state’s conformity to recent federal tax changes but does so selectively rather than full adoption. The state aligns with federal immediate expensing of domestic Section 174A research and experimentation (R&E) costs for all entities except C corporations. Entities such as partnerships and S corporations are allowed to immediately expense domestic R&E costs on Minnesota returns.

C corporations remain decoupled from federal treatment and must continue amortizing R&E costs on their state return, though the amortization schedule changes slightly. The midyear convention is removed for domestic R&E expenses, and C corporations are permitted to deduct 20% each year over a five-year period. In addition, under the transitional rules, the accelerated deduction for research expenses for unamortized research expenses incurred before 2025 is not allowed.

Like bonus depreciation and the other conformity updates introduced with this new law, Minnesota is recognizing the research expense deduction from when it was federally introduced. There is no addback requirement for this deduction for any entity except C corporations.

Other tax updates: Opportunity Zones and technical changes

Beyond the headline items, the 2026 tax bill includes other key provisions.

• Minnesota decouples from the federal Qualified Opportunity Zone (QOZ) deferral of capital gains; taxpayers who deferred capital gains by investing in QOZ funds must include those gains as Minnesota taxable income (with a future subtraction at the time the gain is recognized federally, to avoid double taxation).
• The new tax law includes a one-time property tax refund increase to provide relief for Minnesota homeowners.
• The statute of limitations for tax refund claims was updated, extending the limitation to two years from the date the tax was paid or 3.5 years from when the return was due, whichever is later.
• Minnesota has expanded and extended its Sustainable Aviation Fuel (SAF) tax credit, creating a more valuable incentive for businesses involved in fuel production, blending, and related investments.

Tax planning moves to consider in Minnesota

With these tax law changes now in effect, review your 2025 tax and 2026 tax plans with the new provisions in mind. Some taxpayers may see a reduction in their Minnesota tax liability for the 2025 tax year, and subsequent years. Businesses and individuals, who have already filed their 2025 returns that did not consider this legislation, may benefit from amending their 2025 returns to reflect favorable Minnesota changes.

• Review past returns — A return that didn’t leverage full (100%) bonus depreciation or R&E deductions might now qualify for a refund by incorporating those changes.
• Update 2026 tax plans — Factor in larger depreciation and R&E deductions. Plan ahead for any state taxes due on Opportunity Zone gain deferrals.
• Consider PTET election — If you have a pass-through business, evaluate whether electing PTET for 2026 and 2027 could impact overall tax costs for you and your owners.
• Conduct a detailed, fact-specific analysis — For Section 174A, distinguish domestic from foreign research expenditures, identify whether you’re a pass-through entity or a C corporation, and retain historical R&E amortization schedules from the prior year.
• Other tax changes – Besides business income tax legislation, tax legislation affecting individual income taxes, sales and use taxes, property taxes and miscellaneous taxes were enacted.
• Consult with advisors — The combination of federal conformity and state-specific tax rules can be complex. Speak with your tax advisor to clarify how these changes apply to your situation and develop a plan that considers both tax savings opportunities and compliance.

How CLA can help you navigate Minnesota tax law

Minnesota’s new tax law delivers a mix of tax relief and strategic incentives for businesses.

CLA’s tax professionals can help you navigate these changes with confidence. We help you evaluate how these legislative changes impact your tax position and support you through amending prior returns and considering future deductions. As tax laws evolve quickly, CLA provides guidance to help you understand your options and make informed decisions.

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