How the Minnesota Pass-Through Entity Tax Works
Understand Minnesota's elective PTE tax, a state-level strategy for qualifying business owners to navigate the federal SALT deduction limitation.
The Minnesota Pass-Through Entity (PTE) tax is an elective tax certain businesses can pay on behalf of their owners for tax years beginning after December 31, 2020. Its purpose is a workaround to the federal $10,000 state and local tax (SALT) deduction limit established by the Tax Cuts and Jobs Act of 2017. By shifting the state income tax payment from the owner to the business, the tax becomes a deductible federal business expense for the entity, bypassing the individual SALT cap.
This allows the full amount of state income tax to be deducted for federal purposes, lowering the federal tax liability for the business and its owners. The owners then receive a credit on their personal Minnesota income tax returns for their share of the tax paid, preventing double taxation at the state level. The PTE tax is temporary and available for tax years through 2025.
Qualifying for the Minnesota PTE Tax
To be eligible for the Pass-Through Entity (PTE) tax election in Minnesota, a business must meet certain structural requirements. The election is available to partnerships, S corporations, and limited liability companies (LLCs) taxed as a partnership or S corporation. C corporations and sole proprietorships, including single-member LLCs that have not elected to be taxed as a partnership or S corporation, are not eligible.
An entity is not eligible if any of its owners are a corporation, partnership, or another LLC, with an exception for disregarded single-member LLCs. The ownership must consist of qualifying owners, which are individuals, estates, or certain trusts. For a trust to qualify, it must be a resident or nonresident trust that is a shareholder of a qualifying S corporation, or a grantor trust owned by a U.S. citizen that is treated as a disregarded entity.
Only the income attributable to qualifying owners is included in the PTE tax calculation. For example, if a partnership has a C corporation as a partner, the income flowing to that C corporation is excluded from the PTE tax base. The election requires consent from qualifying owners holding more than a 50% ownership interest and is binding on all qualifying owners for that tax year.
How to Make the PTE Tax Election
The Pass-Through Entity (PTE) tax election is made annually on Schedule PTE, Pass-Through Entity Tax, which is filed with the entity’s Minnesota income tax return. There is no separate form to make the election in advance of filing the return.
The deadline for the election is the due date, including extensions, for the entity’s income tax return. For calendar-year filers, this is March 15 of the following year. An entity can make the election on a timely filed original return or on an amended return filed by the extended due date.
The election is made annually and is binding for that tax year. It cannot be revoked after the original due date of the return has passed. An entity can only revoke an election by filing a subsequent return before the original due date. This annual process requires businesses to re-evaluate the election each year.
Calculating and Paying the Tax
The Minnesota Pass-Through Entity (PTE) tax is calculated by multiplying the entity’s PTE taxable income by the state’s highest individual income tax rate of 9.85%. For S corporations, the PTE taxable income is the entity’s Minnesota source income attributable to its qualifying owners.
For partnerships, the PTE taxable income is the sum of the Minnesota source income for nonresident partners and the total distributive income for Minnesota resident partners. This means all income from the partnership is included for resident partners, not just Minnesota-sourced income. Partnerships with resident partners must complete Schedule PTE-RP as part of this calculation.
Entities electing to pay the PTE tax must make quarterly estimated tax payments. For calendar-year taxpayers, these payments are due on:
- April 15
- June 15
- September 15
- January 15 of the following year
Payments must be submitted through the Minnesota Department of Revenue’s e-Services system. These estimated payments cannot be transferred between an owner’s individual tax account and the entity’s business tax account.
Filing the PTE Return and Claiming the Credit
The entity files its annual Minnesota tax return, which is Form M3 for partnerships or Form M8 for S corporations, and reports the calculated PTE tax. The completed Schedule PTE must be attached to this return.
The entity must provide each qualifying owner with a completed Schedule KPC (for S corporations) or Schedule KPI (for partnerships). This schedule details the owner’s share of the PTE tax paid by the entity and serves as the official documentation the owner needs to claim the credit.
When filing their personal Minnesota income tax return, Form M1, the owner uses the information from their Schedule KPC or KPI to claim a refundable credit. This credit is reported on Schedule M1REF, Refundable Credits, which is filed with Form M1. This direct credit prevents the owner from being taxed again on the same income.