Minn. Bill Seeks Decoupling From CARES Act's Tax-Loss Law

By Daniel Tay
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Law360 (May 8, 2020, 3:32 PM EDT) -- Minnesota would decouple from federal changes on net operating losses and other changes in response to the novel coronavirus pandemic while providing some retroactive conformity on deducting expenses for capital equipment under a bill heard by a legislative committee Friday.

Under H.B. 3389, Minnesota would not conform to provisions in the Coronavirus Aid, Relief and Economic Security Act , or CARES Act, that suspend excess business loss limits. The state would instead require taxpayers to add back federal net operating losses and take the subtractions allowed under state law, which would be determined under the provisions of the 2017 Tax Cuts and Jobs Act . The proposed law on net operating losses would be effective beginning tax year 2020.

"We just can't be kind of tethered to these federal net operating loss laws that would force the state into conformity on things that we can't afford," House Taxes Committee Chairman Paul Marquart, D-Dilworth, said during the committee meeting.

Marquart had introduced the bill in February and the amended version discussed Friday was uploaded to the committee web page Wednesday.

The state would decouple from the CARES Act's increase in the business interest deduction limit for tax years 2018 and 2019, according to the bill. It would also decouple from the act's limit on deducting wages used to claim the employer retention credit for the tax year 2020.

The state would conform to the limitation on the deductibility of wages that are used to claim credits for employer sick leave and family medical leave that was included in the Families First Coronavirus Response Act. It would conform to the CARES Act's exclusions for up to $5,250 in student loan payments made by employers between March 28 and Dec. 31, as well as the act's $300 above-the-line deduction for charitable contributions for 2020.

The bill would also provide full retroactive conformity to Section 179 of the Internal Revenue Code for expensing property acquired in a like-kind exchange and placed in service in 2018 and 2019. The property would have to have qualified for a gain deferral under pre-TCJA law, according to a bill analysis.

For 2020 and later, the bill would have taxpayers subtract 80% of the tax due on gains from property exchanged in a like-kind exchange, and then add back 20% of that amount over the next five years.

This is in contrast to a state Senate tax bill, which would allow Minnesotans to take the full deduction for all Section 179 equipment in the year the qualifying equipment is placed in service, retroactive to tax year 2018.

The House bill would also provide a tax option for pass-through entities to file and pay the corporate franchise tax, with the amount paid then subtracted by each owner of the pass-through on their individual income tax returns. This would allow businesses to "work around" the $10,000 state and local tax limitation on deductions established in the TCJA, according to Marquart.

The Council on State Taxation opposed the bill's proposal to decouple from the business interest expense limitation provisions of the CARES Act, saying that more than two-thirds of the states had conformed to the act or do not impose restrictions.

Fred Nicely, counsel for COST, told Law360 that the bill's proposal would limit the applicability of the Multistate Tax Commission model legislation to partnerships.

The S Corporation Association agreed with the bill's proposal to allow pass-through entities to pay at the entity level, noting that it was revenue neutral.

"This reform, therefore, is a win/win for the state and its pass-through businesses. Minnesota businesses enjoy the restoration of their full SALT deduction and the state makes its Main Street employers more competitive, all at no cost," the association said in a letter to the committee.

Leadership for both parties on the state Taxes Committee did not respond to requests for comment.

--Editing by Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.

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