2010 Minnesota Tax Law Changes

MINNESOTA TAX LAW CHANGES FOR 2010

“Angel” tax credit for small business investments

Starting in 2010, qualified taxpayers will be eligible for a refundable income tax credit for investing in certain small Minnesota businesses.

The credit is equal to 25 percent of any new investment in a qualified business. The maximum credit is $125,000, or $250,000 for a couple filing jointly. Eligible taxpayers will claim the credit on the Minnesota income tax return they file for the year in which the investment is made.

The Department of Employment and Economic Development (DEED) will certify investors, investment funds and businesses as being eligible to participate in the credit program. DEED will also allocate credits to eligible taxpayers who make qualifying investments subject to a statutory maximum annual appropriation, which is $11 million for investments made in 2010.

The credit will sunset after 2014.

Refundable historic structure rehabilitation credit

Beginning in 2010, taxpayers who are eligible for the federal historic rehabilitation credit for improving a certified historic structure located in Minnesota are also eligible for a Minnesota historic rehabilitation credit.

The credit is equal to 100 percent of the federal credit and is taken in the year the project is placed in service. Unlike the federal credit, the Minnesota credit is refundable and can also be transferred. It can be taken as a credit against income, franchise or insurance premiums tax liability.

The credit is set to sunset after fiscal year 2015, although projects certified prior to that date will be allowed to claim the credit in the year in which the project is placed in service.

To qualify for the Minnesota credit, the project developer must apply for certification to the State Historic Preservation Office (SHPO) of the Minnesota Historical Society before any rehabilitation of the historic structure begins.

For additional information regarding the federal rehabilitation credit, see the National Park Service of the U.S. Department of the Interior website at www.nps.gov/history/hps/tps/tax/index.htm or federal Form 3468, which is available on the IRS website at www.irs.gov.

For more information about the application process for the Minnesota credit, see the SHPO website at www.mnhs.org/shp

Credit for increasing research activities expanded

The following three changes were made to the Minnesota research and development credit, beginning with tax year 2010:

• Individual partners of partnerships and shareholders of S corporations are now allowed to claim the credit against their individual income tax.
• The amount of the credit for the first $2,000,000 of qualified expenses has increased from 5 percent to 10 percent of the qualifying expenses.
• The credit is refundable.

Lower income motor fuels tax credit repealed

The lower income motor fuels tax credit for individuals was repealed beginning with tax year 2010. This $25 refundable income tax credit was only available for tax year 2009.

Net operating loss

Federal update: The federal American Recovery and Reinvestment Act (ARRA) of 2009 allows individuals with a 2008 NOL from an eligible small business to elect to carry back this loss for up to five years, rather than only two years. Minnesota has adopted this federal change.

The federal Worker, Homeownership & Business Assistance Act (WHBA) of 2009 extends to 2009 the NOL carryback provisions of the ARRA for small businesses (those with gross receipts of $15 million or less). This legislation also expands the carryback periods to include businesses of all sizes, but limits the election for businesses with revenue exceeding $15 million to either 2008 or 2009, not both years.

Minnesota update: Minnesota did not adopt the five-year NOL carryback provision of WHBA. Individuals choosing this federal option are limited on the Minnesota return to a carryback period of up to the two years preceding the loss. The unused portion of the loss is allowed to be carried forward for up to 20 years.

Federal health care reform

Several tax provisions included in the federal Affordable Care Act of 2010, which was enacted on March 23, 2010, have not been adopted by Minnesota. Therefore, unless and until Minnesota laws are changed, the following adjustments will need to be made when determining Minnesota taxable income:

Health coverage for adult nondependent children. Effective March 30, 2010, the health coverage provided for an employee’s adult nondependent children younger than age 27 is now generally tax-free to the employee for federal purposes. Employees with cafeteria plans are allowed to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

For Minnesota purposes beginning with tax year 2010, employees and self-employed individuals will need to include in Minnesota taxable income the fair market value of the policy providing health coverage for their adult nondependent children. If an affected employee is concerned about having enough Minnesota tax withheld to cover the tax on this income, they may decide to elect additional withholding. To do so, the employee must complete

Adoption expenses. For federal purposes beginning with tax year 2010, the maximum allowable exemption from income for employer-provided adoption expenses increased to $13,170 per child, a $1,000 increase from former law.

For Minnesota purposes beginning with tax year 2010, individuals who received employer-provided adoption expenses will need to include in Minnesota taxable income the amount over $12,170, up to a maximum of $1,000 per child.

Health professionals working in underserved areas. For federal purposes, health-care professionals who work in underserved communities and receive student loan repayment or forgiveness relief under state programs may exclude eligible loan repayment or forgiveness amounts when they file their federal income tax return. This federal provision is retroactive to tax year 2009. Prior to the new law, only amounts received under the National Health Service Corps Loan Repayment Program or certain state loan repayment programs were eligible for the exclusion.

For Minnesota purposes beginning with tax year 2009, health-care professionals will need to include in Minnesota taxable income any student loan repayment or forgiveness they received from participating in state programs that reward those who work in underserved communities.