What Business Owners Should Know
Minnesota business owners who operate through partnerships, S-Corporations, or certain LLCs should be aware of a change to state tax law. Under current law, Minnesota’s Pass-Through Entity (PTE) Tax election will expire for tax years beginning after December 31, 2025.
Unless the Minnesota Legislature extends the program, businesses will no longer be able to elect to pay Minnesota income tax at the entity level starting in 2026.
For many owners of pass-through entities, this change could significantly affect federal and state tax planning.
What Is the Pass-Through Entity Tax?
The PTE tax election allows certain businesses to pay Minnesota income tax at the entity level rather than passing the tax obligation through to individual owners.
Eligible entities include:
-
Partnerships
-
S-Corporations
-
LLCs taxed as Partnerships or S-Corporations
When the election is made, the entity pays Minnesota tax on qualifying income (generally at the highest individual rate, currently 9.85%), and the individual owners receive a refundable credit for the tax paid on their behalf.
Why the PTE Tax Was Created
Minnesota enacted the PTE tax in 2020 as a response to the federal $10,000 cap on the deduction for state and local taxes (the SALT cap) created by the federal Tax Cuts and Jobs Act.
Because businesses can deduct state taxes at the entity level without being subject to the SALT cap, the PTE election effectively allowed many business owners to preserve a federal tax deduction that might otherwise be limited.
For many pass-through entities, this created a valuable planning opportunity.
When the Election Ends
Under current law:
-
The PTE election is only available for tax years beginning before January 1, 2026.
-
Elections must be made by the extended due date of the entity’s tax return for the applicable year.
-
Elections cannot be made for tax years beginning after December 31, 2025.
For example:
-
A calendar-year partnership can still elect the PTE tax for 2025.
-
That election must be made by the entity’s extended filing deadline (generally September 15, 2026).
After that, the election will no longer be available unless the law is extended.
Could the Legislature Extend the Program?
Possibly. Minnesota lawmakers have already introduced proposals to extend the PTE tax election beyond 2025.
However, as of now, no extension has been enacted, meaning businesses should plan under the assumption that the election will expire.
Planning Considerations for Business Owners
The expiration of the PTE election could affect several areas of tax planning:
1. Federal deduction limitations
Owners may again be subject to the federal SALT deduction cap on their personal returns.
2. Estimated tax payments
Businesses currently making entity-level PTE estimated payments may need to shift those payments back to individual owners beginning in 2026.
3. Entity structure decisions
For some businesses, the availability of the PTE election influenced entity structure or tax elections. Its expiration may change those calculations.
4. Multi-state business planning
Many states adopted similar PTE workarounds, so business owners operating in multiple states should review how those elections interact.
The Bottom Line
The Minnesota Pass-Through Entity tax has been an important tax planning tool for many business owners since 2021. However, unless the Legislature acts, the election will sunset after the 2025 tax year.
Business owners should review their tax planning strategies now and consult with their tax and legal advisors to determine how this change may affect their overall tax position.
If you have questions about how Minnesota tax law changes may affect your business or estate planning strategy, our office is happy to help you evaluate your options.
