Here is an overview of the Pass-Through Entity (PTE) Tax. Remember this is an estimate payment from the business entity and does not apply to sole proprietors or single member LLCs.

Other states also have similar elections.

Minnesota Pass-Through Entity Tax (S-Corp and Partnerships)

PTE Election Requirements:

• Eligibility Criteria: This election is specifically tailored for S-Corporations and Partnerships. Single-member LLCs do not qualify.

• Consent Requirement: A majority decision (over 50% ownership) is required to make the election. We recommend adding it to your annual minutes.

• Irrevocability: Once elected for a tax year, the decision cannot be altered.

• Filing: The election is made by adding it to the tax return when filing.

Why the MN PTE Matters:

• Tax Deductibility at the Business Level: By electing the PTE, the business pays state income tax, which is then deductible against its federal taxable income, calculated at Minnesota’s highest tax rate of 9.85%.

• Federal Tax Savings: This election effectively shifts the deduction of state taxes to the business level, potentially resulting in considerable federal tax savings for the business and its owners.

• State Tax Credit Benefit: On their individual Minnesota tax returns, owners are eligible for a credit equal to their proportionate share of the state taxes paid via the PTE election.

Potential Implications:

• Broader Business Impact: The reduction in reported income can influence various aspects of the business, including borrowing capacity and profit-sharing calculations. These impacts should be carefully considered in the context of the business’s overall financial strategy.

How to Proceed:

• Assessment and Documentation: Formally decide on the election, preferably through official annual minutes or similar records.

• Payment Procedures: Estimated tax payments, based on an approximation of 9.85% of expected business profits, should be made via Minnesota’s e-Services portal. Record and retain all payment confirmations for documentation. The fourth quarter estimate should be made in December of the current year for cash basis businesses.

• Election Filing: The actual election is made when filing the Minnesota state return. If subsequent law changes disqualify the entity, estimated payments can be refunded, and the election will not be made.

The MN PTE Tax Election offers a nuanced but potentially advantageous tax strategy for eligible businesses in Minnesota. Understanding the detailed requirements, evaluating the potential benefits and drawbacks, and following the correct procedures are essential for capitalizing on this opportunity.

Here is a link to the MN website:

For more info check out the video 👇️ 

Please like and subscribe!

Connect with me: Facebook / X / LinkedIn

Subscribe to the Tax YouTube Channel.