Pass-through entity tax has expired. What now?

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A Minnesota tax provision that benefited businesses of a certain size was allowed to expire at the end of 2025 — and nobody is quite sure whether it will be reinstated when the state Legislature convenes next month.

Last November, the Minnesota Department of Revenue said the state’s pass-through entity tax (PTE) would expire at the end of the year. A PTE election allows so-called pass-through entities to pay income tax on behalf of their partners, members or shareholders. Minnesota law allows the partners, members or shareholders of the pass-through entity to then take a credit for taxes paid on their behalf.

Qualifying entities include a partnership, an S corporation or a limited liability company taxed as a partnership or S corporation.

The provision was meant as a workaround to the federal $10,000 state and local tax (SALT) deduction cap. It lets qualifying entities to pay Minnesota income tax at the entity level, enabling owners to bypass the federal SALT limitation and claim a full deduction for state taxes on their federal returns.

Cassy Guck, a senior manager with Plymouth-based accounting firm Copeland Buhl, explained that the PTE tax was originally enacted with a sunset provision tied to the SALT deduction cap, which was created by the 2018 Tax Cuts and Jobs Act.

Although the draft 2025 Minnesota omnibus tax bill initially included an extension of the elective PTE tax, Guck said, the provision was removed from the final legislation enacted last June.

“The omission of the PTE tax extension has disappointed many tax professionals and business owners,” she said. “The provision offered meaningful advantages for both Minnesota taxpayers and the Department of Revenue.”

For Minnesota business owners, Guck said, the election allowed a federal deduction that might otherwise be constrained by the SALT cap, or might not be available at all if they claimed the standard deduction.

“Importantly, electing the PTE tax did not alter the total amount of Minnesota tax paid by resident owners,” she said. “It merely shifted the payment responsibility from individuals to the entity.”

The uncertainty surrounding the PTE’s continuation could pose a challenge for businesses as they plan their 2026 estimated tax payments, as well as for individual owners who rely on predictable tax planning, affecting factors including the timing of refunds and whether payments should be made at the entity level or individual level.

“I think the topic is off the radar right now for business owners, but they’ll notice it when they have to pay their tax bill,” said Minneapolis business attorney Aaron Hall. “When the legislation in Minnesota was originally passed, business owners who earned over $100,000 in annual profit were excited. They could at least deduct their state income tax on their federal income taxes as a business expense.”

Another advantage of the PTE tax is that it helped streamline compliance for nonresident owners. Once the tax was paid, it satisfied the state’s filing obligations for nonresidents with no other Minnesota-source income.

Guck said that in certain cases her firm has advised clients to accelerate income into 2025 and defer deductions into 2026 to maximize the benefit of the final year of the election.

“We have also helped clients prepare for higher individual federal tax liabilities beginning in 2026 and advised them to start — or increase — Minnesota individual estimated tax payments, as those payments will no longer be made at the entity level,” she said.

Guck said she’s also making clients aware of a related section of the PTE provision that allowed resident individuals to claim a credit on their Minnesota return for their share of elective PTE taxes paid to other states.

“In many cases, this credit provided a dollar-for-dollar offset of Minnesota tax liability, given that Minnesota’s tax rates are generally higher than those in most other states,” she said.

Nobody is certain whether the provision will be renewed during this session, which starts Feb. 17. The fact that it had a built-in sunset date, however, suggests that it might be.

“I expect it to continue,” said Joe Rapacki, Jr., founder of Edina tax preparation firm Rapacki + Co. “I my experience, Minnesota tends to do things at the last minute. I would be surprised if they let it go.”

Guck isn’t so sure.

“It’s unlikely that the provision will be reinstated during the 2026 legislative session,” she said. “Minnesota typically passes tax legislation in budget years, which occur every two years. Minnesota has not enacted a tax bill in an even-numbered year since 2014.”

If the provision’s status remains uncertain once the Legislature is in session, CPAs are recommending some workarounds, including filing extensions and making extension payments with the company’s first-quarter estimates.

“I can’t think of any reason legislators would oppose reinstating it,” said Hall. “It only helps Minnesotans reduce their federal tax bill. The only argument against it might be something like if a business owner is earning over $100,000, they can afford to pay more in federal income tax. But that threshold is pretty low.”