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Minnesota retroactively updated its state tax law to conform with federal tax law. Taxpayers may feel pinched to file their extensions within the 2018 fall deadline window, although some relief may be available.

Tax reform

Filing Your Fall Return? Five Keys to Minnesota’s Updated 2018 Income Tax Rules

  • Dan Kidney
  • 9/10/2019

A lot has happened in the three months since Minnesota’s 2019 omnibus tax bill was signed into law on May 30, 2019. Many of the developments will affect taxpayers who are working on 2018 Minnesota income tax returns that are due between September and November 2019. Here’s a summary of the key developments.

You don’t need to amend returns for 2017 or 2018 solely to conform

Because H.F. 5 retroactively conformed to many aspects of federal tax law, it was initially unclear whether taxpayers who filed their 2017 or 2018 returns before the forms changed on August 15 would be required to amend those returns to account for this update. The Minnesota Department of Revenue (MDR) has since indicated that no amended returns should be filed solely to reflect these changes.

However, if the return needs to be amended for other reasons (such as to report changes made to the underlying federal income tax return by an IRS audit), then these retroactive changes should generally be incorporated into the amended return as well.

Desk audits are coming

To determine compliance with federal conformity, the MDR will conduct desk audits (where the auditor does not physically meet with the taxpayer) of the tax years affected (either 2017, 2018, or both) and send assessments or refunds to affected taxpayers. In fact, during August 2019, some business taxpayers already started receiving tentative audit reports for this issue.

It’s unclear how this desk audit process will work for pass-through entities, but based on informal discussions with the MDR, they will begin with the ultimate partners and shareholders. This may produce significant complexity for companies with tiered pass-through structures, because the ultimate partner or shareholder will likely not have the information requested by MDR. If more than one CPA firm is involved in preparing the tax returns at each level of the tiered structure, significant time and effort may be involved in responding to these audits.

The following timing is expected for desk audits of tax years 2017 and/or 2018:

  • C corporations, S corporations, partnerships, and fiduciaries: audits should be complete by spring 2020
  • Individual returns: audits should be complete by summer 2020

2017 and 2018 Minnesota income tax forms changed August 15, but there is no grace period for filing them

Between May 30, when Minnesota’s tax bill was enacted, and August 15, when the revised versions of its 2018 income tax forms were published, the MDR had directed taxpayers not to file 2018 Minnesota income tax returns until the new forms were available.

Because the 2018 tax year extended due date for calendar-year S corporation and partnership returns is September 15, 2019, many taxpayers found themselves in the position of having one month or less before the due date to accommodate all of the changes required by the new forms.

In light of this limited turnaround time, many taxpayers asked whether the MDR would offer more time to file the related 2018 returns. The MDR has indicated that there will be no grace period for the typical extended due dates for the 2018 tax year. The table below indicates the original and extended due dates for 2018 income tax returns provided by the MDR for calendar-year taxpayers:

Filer Form Original Due Date Extended Due Date
Partnership M3 March 15 September 15
S corporation M8 March 15 September 15
Individual M1 April 15 October 15
Fiduciary M2 April 15 October 15
C corporation M4 April 15 November 15

Late filing and payment penalties will still be assessed for 2018 income tax returns, though relief may be available

Without a grace period, many taxpayers asked whether there would still be penalties and interest imposed for late filing or late payments. The MDR confirmed that both penalty and interest would still be assessed, though it also acknowledged that taxpayers may request an abatement of these charges.

While it may seem unusual that the MDR would not automatically waive these penalties, the fact that Minnesota’s guidance on penalty waivers lists “a sudden change in the law” as grounds for penalty abatement suggests that the state may be more receptive to granting a reprieve from these penalties.

There will be no additional tax charge — the penalty for underpayments — for 2018 returns

On the revised 2018 forms, the MDR eliminated all line items for reporting this penalty and deleted all of the forms on which this penalty would have been calculated (such as M15, M15C, M15NP, and EST). As a result, no taxpayers will be subject to this penalty for tax year 2018, and the MDR will refund any such payments already made.

On the revised 2017 forms, the MDR will waive this penalty only if the tax after allowable credits was less than $1,000, and if the underpayment was due to uncertainty in tax planning as a result of federal tax law changes enacted after December 31, 2016.

Business and individual updates to the 2018 Minnesota income tax forms

For businesses, including pass-through entities, the changes generally affect only the “NC” schedule for the business (such as Schedules KSNC, KPINC, and KPCNC for pass-throughs and Schedule M4NC for C corporations). Because NC schedules originally indicated federal tax law changes that Minnesota did not conform to for 2018, H.F. 5’s retroactive federal conformity to many of these items causes the related lines to now be blank.

The only other major changes to 2018 business income tax forms were to Schedule NOL (for C corporations) and Form M4NP NOL (for nonprofits with unrelated business income tax, or UBIT), due to the net operating loss (NOL) limitations retroactively imposed upon them for tax year 2018:

  • NOL carryforwards may only offset up to 80% of a taxpayer’s net income, regardless of what tax year the NOL was generated in
  • UBIT NOLs no longer use a 20-year carryforward and two-year carryback, but instead now use the same rules as other C corporations (15-year carryforward and no carryback).
Unless an individual taxpayer is affected by a change on their Schedule M1NC, the updates that Minnesota made to its 2018 tax forms should not affect them.

For individuals, no changes were made except for Schedule M1NC, which generally affects only those individuals who are business owners. As a result, unless an individual taxpayer is affected by a change on their Schedule M1NC, the updates that Minnesota made to its 2018 tax forms should not affect them. The changes that Minnesota made to Schedule M1NC include the deletion of many line items, indicating Minnesota’s retroactive conformity to the federal change for that year. Note that, due to the “special limited adjustment” enacted under H.F. 5, many items that Minnesota retroactively (to 2017 or 2018) conformed to for corporate taxpayers have a 2019 conformity date for noncorporate taxpayers.

What taxpayers should do next

There are still many uncertainties stemming from the above changes, including the logistics for desk audits involving tiered pass-through structures. It’s also unclear what actions taxpayers should take if their 2019 Minnesota income tax returns are due before the MDR desk audits of 2017 and/or 2018 are complete. The MDR has an FAQ page, and CLA’s state and local tax professionals are here to help. We will continue to monitor tax department guidance.