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Staff briefs committee on business taxes: pass‑through entity tax, apportionment and unitary rules
Summary
House Research explained how Minnesota taxes businesses — differences between corporate franchise and pass‑through taxation, the state’s response to the federal SALT cap, apportionment by sales and unitary group treatment.
House Research staff told the committee that Minnesota taxes business income differently depending on business form and reviewed recently adopted policy responses to federal changes.
Chris Klayman explained that C corporations are taxed at the entity level under the corporate franchise tax (federal form 1120 is the usual starting point), whereas pass‑through businesses (S corporations, partnerships, LLCs, sole proprietorships) are generally taxed under the individual income tax and thus their income passes to owners’ individual returns.
Klayman and Sean Williams described the federal limitation on state and local tax deductions (the SALT cap enacted as part of the 2017 Tax Cuts and Jobs Act) and Minnesota’s statutory response. Klayman said Minnesota enacted a pass‑through entity tax to allow pass‑through entities to pay tax at the entity level and thereby enable federal deductibility of state taxes; he said that measure was enacted around 2021.
Staff also explained apportionment: Minnesota generally uses a single‑sales‑factor apportionment in which a multistate corporation’s Minnesota tax base is the portion of its sales in Minnesota relative to total sales. On unitary taxation, staff said a unitary group is treated as a single taxpayer for some purposes; intercompany transactions are eliminated and the entire unitary group’s income is apportioned, which typically enlarges the denominator and can lower the apportionment percentage even though it brings more income into apportionment.
Members asked about conformity on extractive‑industry deductions (percentage depletion) and how long Minnesota has not conformed. Staff said percentage depletion generally applies to oil, gas and minerals and that they would follow up with more detailed research. Representative Patty Anderson and others discussed the administrative complexities that can arise when state and federal conformity differs for depreciation, net operating losses and other timing items.
