Overview
- The Minnesota Budget Bill was recently signed by Governor Tim Walz on May 27, 2026, and included notable provisions, including updating Minnesota’s Internal Revenue Code of 1986, as amended (the “IRC”) conformity date to May 1, 2026, updates on conformity to certain changes in OB3, and extending the pass-through entity tax election date.
The Bottom Line
On May 27, 2026, Minnesota enacted House File 2438 (“H.F. 2438”) which enacts several changes to the Minnesota tax code, including the federal tax conformity date. Minnesota’s conformity date for the IRC is May 1, 2026. According to the bill, this change is effective immediately, with certain changes applied retroactively to match federal timing.
For individuals, estates, and trusts with net investment income over one million dollars, there is a 1% tax on net investment income over that amount, starting for taxable years beginning after December 31, 2026. In addition, non-corporate taxpayers are allowed the full immediate expensing of domestic research and experimentation (R&E) provided under IRC § 174A. Minnesota’s elective pass-through entity (“PTE”) tax is extended through the 2027 tax year, with the corresponding PTE tax credit extended through the 2027 tax year.
For corporate income tax purposes, H.F. 2438 decouples from the full immediate expensing of domestic R&E provided under IRC § 174A and instead requires 80% of any federal domestic R&E deduction to be added back to federal taxable income for tax years beginning after December 31, 2024. The bill also requires an 80% addback for the retroactive catch-up deduction claimed under the federal transition rules for domestic R&E expenditures incurred during the 2022 through 2024 tax years. Minnesota allows a subtraction for these amounts ratably over the four subsequent years. Lastly, the bill requires taxpayers that elect federally to deduct remaining unamortized domestic R&E expenditures attributable to the 2022 to 2024 tax years must add back the federal deduction for Minnesota purposes. These amounts must continue to be amortized under the five-year amortization schedule as if an election under the transition rules was not made.
For corporate taxpayers, Minnesota requires an addback for certain federal exclusions including the opportunity zone gains deferred or excluded for federal income tax purposes, interest on loans secured by rural or agricultural real property, and certain business meals over 50% of cost. For the opportunity zone gains deferred or excluded that are added back, there is a corresponding subtraction for when the opportunity zone capital gain is recognized in a subsequent tax year.
For tax years beginning on or after January 1, 2026, for purposes of computing the dividends received deduction, the bill provides that net controlled foreign corporation (“CFC”) tested income (“NCTI”) is dividend income and therefore eligible for the 50% dividends received deduction. Minnesota’s NCTI is calculated by taking the federal NCTI inclusion determined without regard to the One Big Beautiful Bill Act’s (“OB3”) permanent extension of the IRC § 954(c)(6) CFC look-through rule and then allowing a reduction of 10% of the CFC’s qualified business asset investment (“QBAI”) that existed under the pre-OB3 GILTI rules.
In Summary
Minnesota’s bill provides new complexities that taxpayers should be aware of including, but not limited to, the new IRC conformity date that may apply retroactively, the domestic R&E expense treatment differences depending on the type of taxpayer, and the computation of NCTI and subpart F income. Forvis Mazars can assist you in navigating these issues.