Minnesota IRC Conformity Update; Amended Returns May Be Required

On January 12, 2023, Minnesota updated (H.F. 31) its Internal Revenue Code (IRC) conformity date to December 15, 2022.  The bill impacts corporate, trust, estate, and individual taxpayers.  In addition to advancing its IRC conformity date, the Minnesota changes update the treatment of disallowed and delayed business interest expenses and net operating losses, as well as several other temporary additions and subtractions to various provisions.

The bill may affect taxpayers that filed Minnesota income tax returns for 2017 through 2022 with conformity schedules.  The Minnesota changes are effective retroactively to the same time the changes were effective for federal purposes.  As a result, amended returns may be required for those tax periods.

IRC Conformity Date

Minnesota is considered a “fixed-date” conformity state.  Before H.F. 31, Minnesota conformed to the IRC as amended through December 31, 2018. As a result, Minnesota did not previously conform to any of the CARES Act and other federal tax changes enacted after 2018.  The bill generally updates the state’s definition of “Internal Revenue Code” to mean the IRC as amended through December 15, 2022.  Accordingly, by updating its general IRC conformity date, Minnesota now includes taxpayer-friendly provisions from the CARES Act, the Consolidated Appropriations Act of 2021, and the American Rescue Plan, among other federal bills enacted during the COVID-19 pandemic.

Minnesota’s IRC conformity changes are effective “the day following final enactment, except the changes incorporated by federal changes are effective retroactively at the same time the changes were effective for federal purposes.”

Section 163(j) Business Interest Expense Limitation

Before H.F. 31, Minnesota conformed to the TCJA version of IRC Section 163(j), which limited a taxpayer’s business interest expense (BIE) to 30% of its adjusted taxable income (ATI). As a result, Minnesota taxpayers did not benefit from the CARES Act increase of the limitation to 50% of the taxpayer’s ATI for the 2019 and 2020 tax years.

H.F. 31 retroactively adopts the CARES Act increase in the Section 163(j) limitation for those tax years.  Therefore, addition and subtraction modifications for the 2019 and 2020 tax years result in a taxpayer calculating a “delayed business interest” amount for each year.  Unfortunately for taxpayers however, this benefit is delayed and carried forward into future years.

Under H.F. 31, “any excess is a delayed business interest carryforward, the entire amount of which must be carried to the earliest taxable year.  No subtraction [for the delayed business interest] is allowed for tax years beginning after December 31, 2022.”  H.F. 31 then allows the carryover amount remaining at the end of 2022 to be taken as a one-fifth subtraction for each year over a five-year period starting with the tax year beginning after December 31, 2022.

Net Operating Loss (NOL) Carryforwards and Delayed Subtraction

The CARES Act also temporarily suspended the federal 80% of taxable income limitation for NOL carryforwards generated in tax years before 2021.  Until H.F. 31, Minnesota’s IRC conformity date did not accommodate conformity to the CARES Act’s temporary suspension of this limitation.  But, given the retroactive operation of Minnesota’s IRC conformity as a result of H.F. 31, that suspension is now followed by Minnesota for the applicable tax years.  However, Minnesota will treat any federal NOL in excess of the limitation that was generated in a taxable year beginning after December 31, 2017, and before January 1, 2021, as an addition modification.  The amount of the addition is then treated as a “delayed net operating loss deduction” or subtraction that is carried to the earliest taxable year for up to 20 taxable years at which time the delayed NOL deduction expires.

Section 461(l) Excess Business Losses and Delayed Subtraction

Similarly, the CARES Act also temporarily suspended the TCJA’s Section 461(l) limitation for the deduction of non-corporate business losses for taxable years before 2021 (e.g., $500,000 loss limitation for married taxpayers filing jointly or $250,000 for single taxpayers).  As with the retroactive treatment of the suspension of the CARES Act NOL carryforward limitation, H.F. 31 also treats any federal Section 461(l) loss in excess of the limitation that was generated in a taxable year beginning after December 31, 2017, and before January 1, 2021, as an addition modification.  In turn, the amount of the addition is treated as a “delayed Minnesota loss deduction.”  Unlike the treatment of the “delayed net operating loss deduction,” however, the “disallowed Minnesota loss carryover” is not until the tax year beginning after December 31, 2025.   

Temporary Additions and Subtractions

In addition to the notable IRC provisions discussed above, H.F. 31 also modifies Minnesota’s conformity to several temporary additions and subtractions from pandemic-related federal legislation, which would otherwise be adopted as part of the IRC conformity update:   

• Wages used to compute the federal employee retention credit (ERC) and disallowed as a deduction for federal purposes are retroactively allowed as a Minnesota subtraction. 
• Business meals deducted in excess of the 50% limitation for the 2021 and 2022 tax years are retroactively treated as a Minnesota addition.
• For C Corporations, charitable contributions deducted in excess of 10%, but not more than 25% of taxable income for the 2020 and 2021 tax years, are also treated as Minnesota additions.

Extension of Statute of Limitations

Minnesota’s retroactive conformity and related additions and subtractions may require taxpayers to file amended returns for tax years 2017 through 2022.  The bill extends the statute of limitations on closed periods for taxpayers that are affected by H.F. 31.  A taxpayer whose tax liability changes as a result of H.F. 31 may file an amended return by December 31, 2023. 

The Commissioner may review and assess the return of a taxpayer covered by this provision until the later of (1) the general applicable statute of limitations or (2) one year from the date the amended return is filed.

 Interest on any additional liabilities as a result of any provision in H.F. 31 accrues beginning on January 1, 2024.

Minnesota Department of Revenue Resources

The Department of Revenue has posted several online resources addressing the impact of the updated IRC conformity. The following resources are currently available:

• Tax law changes, 2023 legislative session
• 2023 Federal Conformity for Income Tax
• 2023 federal conformity FAQs
• Conformity by Federal Act
• Conformity by Form and Line
• Federal nonconformity provisions, 2017 – 2022 tax years

BDO Insights

Taxpayers and their tax advisors will need to navigate Minnesota’s complex retroactive federal conformity, additions, and delayed prospective subtractions regime enacted by H.F. 31.  Amended returns will likely need to be filed to report the required additions while maintaining separate Minnesota schedules to benefit from the delayed subtractions applicable to future tax years.