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 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.”
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.