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Minnesota Tax Bills Headed For Likely Special Session

By Daniel Tay · May 19, 2020, 3:43 PM EDT

The Minnesota Legislature is likely headed for a June special session to discuss bond and tax bills, which would include pandemic tax relief and federal conformity proposals, after lawmakers failed to reach agreement on bonding by the regular session's end.

The Legislature adjourned early Monday with no tax bills approved by both chambers. S.B. 3843 would fully conform to federal law on deducting expenses for capital equipment, and H.B. 3389 would only provide retroactive full conformity, among other differences.

The bills were passed by their respective chambers but were not taken up by the second chamber.

Gov. Tim Walz, of the Democratic-Farmer-Labor Party, said in a virtual news conference Monday that there would likely be a special session starting June 12. The state Senate is Republican-controlled, and Democrats control the House.

Senate Majority Leader Paul Gazelka, R-Nisswa, said the final tax bill was tied to the state's bond bill, with the failure to agree on the bond bill meaning the tax bill was not approved.

Gazelka said at a virtual news conference that the two chambers had reached a compromise on the issue of conformity to Section 179 of the Internal Revenue Code, which at the federal level allows full deduction for certain business assets in the year the qualifying equipment is placed in service.

"I don't know if there were any sticking points at the end; it was just waiting for the bonding bill to get done," Gazelka said, saying the two chambers were "very close" on a tax bill.

The House had pushed for a bill with $2.03 billion in bonds, while the Senate had pushed for a $998 million package, but both proposals failed to garner three-fifths of the vote in their respective chambers. At least a three-fifths vote is required to issue state general obligation bonds for capital improvements.

Gazelka said Monday there had been agreement on a final figure for the bonds but declined to provide the exact number, only confirming that it was near the $1.1 billion to $1.3 billion range.

Walz said at his news conference that he was proud of certain issues that the Legislature had made progress on in the session, such as raising the legal age for buying tobacco from 18 to 21, but expressed disappointment that the bond bill had not passed.

House Speaker Melissa Hortman, DFL-Brooklyn Park, noted the effect of the pandemic on the session, saying it had "kind of reached in and grabbed the heart of the legislative session out."

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.

The state would decouple from the CARES Act's increase in the business interest deduction limit for tax years 2018 and 2019 under the House 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 .

H.B. 3389 would also provide full retroactive conformity to Section 179 for expensing property acquired in a like-kind exchange and placed in service in 2018 and 2019. For 2020 and later, the bill would have taxpayers subtract 80% of the tax due on gains from a like-kind exchange, and then add back 20% of that amount over the next five years, similarly to what is currently in state statute.

The House bill would also provide an 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 that person's individual income tax return.

S.B. 3843 would extend certain filing and payment deadlines; waive penalties for property, individual income and corporate income taxes; and push back the dates for estimated tax and accelerated sales and use tax payments in response to the COVID-19 pandemic caused by the new coronavirus. The bill would also provide full Section 179 conformity retroactive to tax year 2018.

Additionally, the Senate bill would provide that loans from the federal Paycheck Protection Program, a response to the pandemic's economic impacts on small businesses, are not taxable by the state. Taxpayers would not be allowed to claim a double benefit by excluding the loans from gross income and also claiming deductions ordinarily allowed for employee expenses.

The state last June partly conformed to federal changes in the TCJA, raising the Section 179 deduction limit to $1 million, but retained a state cap on the amount deductible in the first year and a requirement that adds back the excess over the cap before being deducted in following years.

Walz and leadership for both chambers did not respond to requests for additional comment.

--Editing by Neil Cohen.

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