Tax Guide For Minnesota Businesses

Transcription

1 Tax Guide For Minnesota Businesses

2 TAX GUIDE FOR MINNESOTA BUSINESSES Olsen Thielen & Co., Ltd. Certified Public Accountants & Consultants 2675 Long Lake Road 300 Prairie Center Drive #300 Roseville, MN Eden Prairie, MN (651) (952) FAX (651) FAX (952) Copyright 1992 Latest Revision 2017 All Rights Reserved Printed in the United States of America This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the information is presented in general terms and is not intended to be used as a basis for specific action without obtaining the services of a competent tax professional. Copyright is not claimed in any material secured from official U.S. Government sources.

3 TAX GUIDE FOR MINNESOTA BUSINESSES TABLE OF CONTENTS CHAPTER PAGE 1. Starting a Business in Minnesota Federal and Minnesota Income Tax Minnesota Minimum Fee S Corporations Fiscal Year Rules General Partnerships, Limited Partnerships, and Limited Liability Partnerships Minnesota Limited Liability Companies Depreciation Amortization of Intangible Assets Recordkeeping for Business Vehicles "Luxury" Auto Rules Business Expense Reporting for Statutory Employees Travel, Entertainment, Business Gifts and Club Dues Lobbying Expenses Minnesota Sales and Use Tax Federal Heavy Highway Vehicle Use Tax Heavy Vehicle Excise Tax Qualified and Nonqualified Deferred Compensation (Retirement Plans) Fringe Benefits Reporting Cash Transactions that Exceed $10, Unclaimed Property Electronic Filing and Payments

4 CHAPTER 1 - STARTING A BUSINESS IN MINNESOTA Your business may be organized in one of several forms. Each has specific requirements for reporting to the Internal Revenue Service and to other federal and state governmental agencies. The most common ways businesses are organized are as: sole proprietorships; partnerships; corporations; limited liability companies; and limited liability partnerships. Sole Proprietorships Getting Started - A sole proprietorship is the simplest form of business to organize. Depending on the nature of the business, the owner may need to obtain a business license. All Minnesota public libraries have a copy of the State of Minnesota Directory of Licenses and Permits for regulated activities, which lists the department and phone number for each agency where you can receive more information. The information is also available online at You also will need to check with your city or municipality to see if any local licenses are required and if you are subject to local zoning ordinances. Otherwise, obtaining tax identification numbers and registering the business name allows you to set up shop. Tax Reporting - The income or loss from a sole proprietorship is reported on the business owner's individual tax returns. Business income and expenses are reported on Schedule C of Form The income or loss is combined with the taxpayer's other tax reportable items and the result is taxed at the individual taxpayer's rates. In addition, the sole proprietor files Schedule SE, which computes the Social Security self-employment tax for the federal return. One-half of that tax is an adjustment reducing federal adjusted gross income. Partnerships Getting Started - A general partnership can be established with relatively few formalities. Most issues relating to the allocation and distribution of profits and losses, responsibilities of partners, and other items are laid out in a partnership agreement. A written document is not legally required, but is strongly recommended. It does not have to be filed with any governmental entity. Setting up a limited partnership is a much more complex situation. The offering of limited partnership units is subject to tax and securities laws and must meet specific requirements. Therefore, you should seek professional assistance before attempting to organize a limited partnership. In some cases, public filings may be required. Tax Reporting - A partnership files federal Form 1065 and Minnesota Form M3 information returns. The income, deductions and credits created by the partnership are passed through to the partners according to the terms of the partnership agreement and the amounts are shown on Schedule K-1 for each partner. Most taxes are paid at the individual partner's level using Schedule E on the partner's 1040 return. This income may be subject to self employment tax. Minnesota has a minimum fee, paid at the partnership level. The fee is determined by various factors including Minnesota payroll, property and sales. The fee ranges from $0 to $9,770 (for 2017). (See Minnesota Minimum Fee chapter). All Minnesota Limited Partnerships are required to file an annual renewal with the Minnesota Secretary of State. There is no fee to file the annual renewal. Chapter 1 1

5 Corporations Getting Started - There are several formal procedures that must be followed to set up a corporation in Minnesota. Typically, an attorney would draft your Articles of Incorporation after consulting with you and your accountant. The Articles must include, at a minimum: 1. the corporate name; 2. the registered office address; 3. the number of authorized shares; and 4. the names, addresses, and signatures of all incorporators. The Articles of Incorporation should be filed at the Secretary of State s office. The cost of filing is $155 for expedited service in-person and online filings ($135 is submitted by mail). By default, state statutes govern many facets of corporate life if specific provisions are not addressed. Consulting with someone who knows what is contained in the state laws, and who can help you analyze whether or not these automatic provisions will enable you to run your business as you planned. There are specific rules concerning the form of the corporate name. Business corporation names must include a corporate designation such as Incorporated, Corporation, Company, Limited, or an abbreviation of one of these words. You can obtain an unguaranteed preliminary check on the availability of the name chosen by calling the Secretary of State's office at (651) , toll free at (877) or on the Internet at It is possible to file to reserve a corporate name for a period of one year. A corporation needs to obtain federal and state identification numbers. Stock needs to be issued and corporate books and records must be set up and maintained. Depending on the structure and size of a corporation, it may be subject to state and federal securities laws. Tax Reporting - A corporation files an annual renewal form with the Minnesota Secretary of State. This process is completed on the Internet. There is no fee to file the annual renewal. Unless a corporation has made a special election, it will follow the C corporation tax rules. Its income, deductions and credits are reported on federal Form 1120 and Minnesota Form M4 and their supporting forms and schedules. Taxes are paid at the corporate level. If dividends are paid, a Form 1099-DIV is issued to the recipient. The person who receives dividends reports them as income on their individual tax return. If a corporation meets certain requirements, it may elect to be treated as an S corporation. It must file Form 2553 with the Internal Revenue Service within a specific time frame and all shareholders must consent to this treatment in writing. In this case, the tax rules the S corporation must follow are similar to those of a partnership. Income, deductions and credits of the corporation are passed through to shareholders and taxed to them at their individual rates. An S corporation files federal Form 1120S and Minnesota Form M8. The amounts passed through to the individual shareholders are reported on Schedule K-1. (See the S Corporations chapter). Both C corporations and S corporations are subject to the Minnesota minimum fee, based on Minnesota payroll, property and sales. The fee ranges from $0 to $9,770 (for 2017). (See Minnesota Minimum Fee chapter). Chapter 1 2

6 Limited Liability Companies (LLC) Getting Started - There are various formal procedures required to set up a limited liability company in Minnesota. No person under the age of 18 may act as an organizer of a limited liability company. A limited liability company may organize and continue with a single member or an unlimited number of members. Typically, an attorney would draft your Articles of Organization after consulting with you and your accountant. The Articles must include at a minimum: 1. the limited liability company's name; 2. the registered office address and agent (if any); and 3. the name and address of each organizer. For professional organizations (governed under Chapter 319B) the articles must include the above plus the period of existence (if not perpetual). The Articles of Organization should be filed at the Secretary of State s Office. The cost of filing is $155 for expedited service in-person and online filings ($135 if submitting by mail). A limited liability company must follow specific rules regarding the company name and protection of that company name. The name must include Limited Liability Company or LLC and may not include the words Corporation or Incorporated or their abbreviations. Tax Reporting - For income tax purposes, a Minnesota LLC that has two or more members is classified as a partnership and files a partnership tax return. A single member LLC will be disregarded as a separate entity from its owner and file as a Schedule C in the case of an individual or as a branch or division if the owner is a corporation. If an LLC is formed in a state other than Minnesota, tax law in that state will determine whether the LLC is taxed as a partnership or a corporation. A Minnesota limited liability company must file an annual renewal form. A non-minnesota limited liability company doing business in Minnesota must also register annually with Minnesota as a foreign limited liability company. There is no fee to file the annual renewals. Limited Liability Partnerships - (LLP) Getting Started - A limited liability partnership must start out as a general partnership. A special registration is required to be filed with the State of Minnesota to receive limited liability protection. A renewal must be filed annually and requires a fee of $155 for expedited service in-person and online filings ($135 if submitting by mail). Failure to file annually will cause the LLP to lose its limited liability protection. Tax Reporting - For both federal and Minnesota income tax purposes, a limited liability partnership files a partnership tax return. Chapter 1 3

7 Assumed Name Anyone doing business in Minnesota under a name other than the full name of the individuals involved or the entity's legal name must file an assumed name with the Secretary of State's office. A Certificate of Assumed Name form can be obtained by calling (651) or on-line at This office will also do an unguaranteed preliminary check on the availability of the name you've chosen over the phone. The form must be completed, signed and returned with a filing fee; $50 for expedited service inperson and online filings ($30 if submitted by mail). Filing fee for amendments is $50 for expedited services in-person and online filings ($30 if submitted by mail). For original filings after September 1, 2011, an annual renewal is required to be filed once every calendar year. There is no charge for the annual filing. If assumed name is expired due to not filing an annual return, there is a reinstatement fee. The fee is $45 for expedited service in-person and online filings ($25 if submitted by mail). If originally submitted information changes, you must file an amendment within 60 days of the change. Once you receive notice that your name has been accepted, you must have the form published in two consecutive issues of a legal newspaper in the county where you have a registered office or place of business. Retain the affidavit of publication from the newspaper and the newspaper ad. * * * * * Chapter 1 4

8 CHAPTER 2 - FEDERAL AND MINNESOTA INCOME TAX Corporation - Form 1120 FEDERAL INCOME TAXES Due Date and Extensions - For tax years beginning on or after January 1, 2016, the due dates and extensions are as follows: Original Due Date Extension Available Extended Due Date Calendar Year April 15 th 6 Months October 15 th Fiscal Year (Excluding June 30) 15 th day of the 4 th month after year-end 6 Months 15 th day of the 10 th month after year-end June 30 Fiscal Year September 15 th 7 Months April 15 th Requirement to File Electronically - Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Form 1120 income tax returns. Late Filing Penalty - If the return is not filed by the original or extended due date a 5% per month penalty is charged up to a maximum of 25% of the unpaid tax. The minimum penalty for failure to file within 60 days of the due date is the lesser of the amount due shown on the return or $210. Late Payment Penalty - A corporation that does not pay the tax due may have a penalty of 1/2 of 1% per month charged on the balance due, up to a maximum of 25%. This penalty, when combined with the late filing penalty, cannot exceed 5% for any month in which both penalties apply. Interest - Interest is charged on all amounts not paid by the original due date even if an extension is filed. Consolidated Return - A corporate parent-subsidiary controlled group may elect to file a consolidated return. The income and expense of all affiliates are combined together and reported on one return. The entire group is taxed as one corporation. Losses of one corporation may offset income of another corporation, and credits earned currently by any corporation in the group will reduce the income tax of the entire group. Special rules apply to carryover losses and credits. Minnesota minimum fee is calculated and paid for each separate corporation in a consolidated return. A parent-subsidiary controlled group is a chain of corporations connected through stock ownership with a common parent. A typical example of this type of controlled group is a parent corporation and one or two subsidiary corporations that are 100% owned by the parent. Once an election is made to file consolidated returns, you must continue to file in this manner unless you receive permission from the Internal Revenue Service (IRS) to file separately. S Corporation - Form 1120S Due Date - 15 th day of 3 rd month following year end. For calendar year taxpayers, the due date is March 15 th. Extension - An automatic extension of up to 6 months can be obtained by filing Form Requirement to File Electronically - Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Form 1120S income tax returns. Chapter 2 5

9 Late Filing Penalty - The late filing penalty stated above for regular corporations also applies to S corporations. In addition, for returns on which no tax is due, a penalty of $200 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation s tax year for which the return is due. If tax is due, the minimum additional late filing penalty for filing returns more than 60 days late increases to $210 or the balance of the tax due on return, whichever is smaller. Late Payment Penalty - S corporations usually pay no tax at the corporate level. However, built-in gains tax and certain other taxes are paid at the corporate level. The same late payment penalties listed above for regular corporations apply to the late payment of tax on an S corporation return. Interest - Interest is charged on all amounts not paid by the original due date even if an extension is filed. S Corporation Schedule K-1 - Schedule K-1, Form 1120S and a copy of the Shareholder's Instructions for Schedule K-1 must be given to each shareholder on or before the day on which Form 1120S is filed. There is a $260 penalty for each failure to provide Schedule K-1 on time. The $260 penalty is increased to $530 if failure is due to intentional disregard. Corporate Estimated Tax Payments If a corporation expects its tax for the year to exceed $500, it is required to make quarterly estimated tax payments or be subject to a penalty. See Electronic Filing and Payments chapter for payment information. If a consolidated return is filed, the parent corporation makes the estimated payment covering the tax liability of all members of the affiliated group. An underpayment penalty is assessed unless current year estimates are at least one of the following: Exception 1 - An amount equal to the prior year's tax liability, provided you paid tax in the prior year and the year consisted of 12 months. Exception 2 - An amount equal to 100% of the tax figured on annualized current year taxable income for specified months preceding an installment date. A corporation that bases its estimated tax payments on actual current year tax or annualized current year tax (Exception 2) must make quarterly estimated tax payments equal to 100% of the current year tax. A large corporation (a corporation with taxable income before net operating loss of at least $1,000,000 for any of the last three taxable years) must use Exception 2 if they want to avoid underpayment penalties. Large corporations may use Exception 1 for their first quarter payments. Chapter 2 6

10 Regular Tax Rates Tax Rates For tax years beginning in 2017 and earlier, the tax rates are as follows: Taxable Income Rate $ 0 $ 50,000 15% 50,001 75,000 $ 7,500 plus 25% over $ 50,000 75, ,000 13,750 plus 34% over 75, , ,000 22,250 plus 39% over 100, ,001 10,000, ,900 plus 34% over 335,000 10,000,001 15,000,000 3,400,000 plus 35% over 10,000,000 15,000,001 18,333,333 5,150,000 plus 38% over 15,000,000 18,333,334 35% over 0 Taxable income of all members of the controlled group is taken into consideration when determining the phase out of the lower tax brackets. Members of a controlled group (parent-subsidiary or brother-sister group) apportion the lower tax brackets between members of the group. Personal Service Corporations are taxed at a flat 35% of their entire taxable income (for 2017 and earlier years). For tax years beginning after December 31, 2017, the corporate tax rate is a flat 21% (including Personal Service Corporations). Alternative Minimum Tax (AMT) For tax years beginning in 2017 and earlier, a corporation may also be subject to an alternative minimum tax. Alternative minimum tax is designed to ensure that corporations are not allowed to escape taxation completely through use of various allowable deductions and methods. It is important when planning for tax expense to have the alternative minimum tax calculated. The alternative minimum tax is repealed for tax years beginning after December 31, Alternative Minimum Tax for Small Corporations The tentative minimum tax of a small business corporation is zero. A small business corporation is defined as a C-corporation with: less than $5,000,000 in average annual gross receipts for its first three taxable years beginning after December 31, 1993; and less than $7,500,000 in average annual gross receipts for the preceding three taxable years (test years). Once a corporation exceeds the $7,500,000 test, the corporation loses its small business status and can no longer take advantage of the AMT exemption. Corporations not in existence for the entire three-year period apply the test on the basis of the periods during which they exist. The first year that a corporation is in existence, the tentative minimum tax of the corporation is zero. Minimum Tax Credit For tax years beginning after 2017 and before 2022, the AMT credit is refundable and can offset regular tax liability in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the minimum tax credit will be allowed in tax years beginning before Chapter 2 7

11 Partnership Income Tax Return - Form 1065 Due Date - For tax years beginning on or after January 1, 2016, the due date is the 15 th day of the 3 rd month following year end. For calendar year taxpayers, the due date is March 15 th. Extension - An automatic extension of 6 months can be obtained by filing Form Late Filing Penalty For returns required to be filed after December 31, 2009, the penalty is $200 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership s tax year for which the return is due. Partnership Schedule K-1 - Schedule K-1, Form 1065 and a copy of the Partner's Instructions for Schedule K-1 must be given to each partner on or before the day on which Form 1065 is filed. There is a $260 penalty for each failure to provide Schedule K-1 on time. The $260 penalty is increased to $530 if failure is due to intentional disregard. An electing large partnership must furnish Schedules K-1 to partners by the first March 15 th following the close of the partnership s taxable year. An electing large partnership has more than 100 partners based upon the preceding taxable year. Electronic Filing - Partnerships with more than 100 partners are required to file the partnership return and Schedules K-1 electronically. MINNESOTA INCOME TAXES Minnesota Corporate Franchise Tax Return - Form M4 Due Date - 15 th day of 4 th month after year end. For calendar year taxpayers, the due date is April 15 th, the same day as the Federal return. Payments - Payments by check need to have a voucher created online at The voucher and check will need to be mailed in together. See Electronic Filing and Payments chapter to determine if you are required to deposit electronically. Extension - No form required. Automatic seven month extensions are granted. Any tax not paid by the original due date is subject to interest and penalties. See Payments section above. Rate - 9.8% and minimum fee (see Minnesota Minimum Fee chapter). Late Filing Penalty - Late filing is subject to a one-time penalty of 5% of the balance due. An additional 5% is charged if the balance due is still unpaid when the late return is filed. Late Payment Penalty - The late payment penalty is a one-time charge of 6% of the balance due. Interest - Interest is charged on all amounts not paid by the original due dates. The rate is 4% for Estimated Tax - Payments need to be made quarterly to pay the lesser of 100% of prior year tax, or 100% of current year tax, if tax is expected to be $500 or more (see payments section above). If you had no prior year tax liability, or the prior year consisted of less than 12 months, you must pay 100% of the current year tax. Separate rules apply to large corporations. There is no penalty on the first Minnesota tax return filed. Alternative Minimum Tax - 5.8% of alternative minimum taxable income. If exempt for federal, then exempt for Minnesota. Consolidated/Combined Return - Mandatory combined return for unitary groups. Chapter 2 8

12 Minnesota S Corporation Income Tax Return - Form M8 Due Date - 15 th day of 3 rd month after year end. For calendar year taxpayers, the due date is March 15 th. Payments - Payments by check need to have a voucher created online at The voucher and check will need to be mailed in together. See Electronic Filing and Payments chapter to determine if you are required to deposit electronically. Extension - No form required. Automatic 6 month extension. Any tax not paid by the original due date is subject to interest and penalties. Estimated Tax - Payments need to be made quarterly to pay 100% of prior year tax or 90% of current year tax, if tax is expected to be $500 or more, or if any nonresident individual shareholder s share of the composite income tax is $500 or more. Include investment passive income tax, built-in gains tax, capital gains tax and minimum fee. Penalties - The same penalties applicable to regular corporate returns apply to S-corporation returns. Annual Renewal Form For A Minnesota Business Corporation Minnesota law requires every corporation, including S corporations, incorporated in the State of Minnesota to file the Domestic Corporation Annual Renewal form annually to confirm registration with the Secretary of State. The information is used to identify your corporation with the state records. This information is available to the public. Due Date 1. Once each calendar year. 2. The renewal form must be submitted directly to the Secretary of State by December 31 st. The Secretary of State is strongly encouraging corporations to file their annual renewal online at Penalty for Failure to File 1. The corporation may lose good standing. Filing a current year renewal and paying a $45 fee for expedited service in-person and online filings ($25 if submitted by mail) may retroactively reinstate its existence. 2. If you fail to file for three years, your corporation may be subject to dissolution and your corporate name may be given to another corporation. Changes to Corporate Records - The information submitted on this form must agree with the information on file with the Secretary of State. Therefore, if you have made any changes, such as a change of registered office, you must amend your articles of incorporation accordingly. Changes are made on either a "Notice of Change of Registered Office/Registered Agent, or Amendment of Articles of Incorporation form. These forms are available from the Secretary of State's office (651) or online at The cost of filing either form is $55 for expedited service in-person and online filings ($35 if submitted by mail). Chapter 2 9

13 Minnesota Partnership Income Tax Return - Form M3 Due Date For tax years beginning on or after January 1, 2016, the due date is the 15 th day of 3 rd month after year-end. For a calendar year taxpayer, the due date is March 15 th. Payments - Payments by check need to have a voucher created online at The voucher and check will need to be mailed in together. See Electronic Filing and Payments chapter to determine if you are required to deposit electronically. Extension - No form required. Automatic 6 month extension. Any tax not paid by the original due date is subject to interest and penalties. See Payments section on previous page. Estimated Tax Payments need to be made quarterly to pay the lesser of 100% of prior year tax or 90% of current year tax if the estimated sum of its minimum fee, nonresident withholding and composite tax returns is $500 or more. Penalties - The same penalties applicable to regular corporate returns apply to partnership returns. Note - MN Limited Liability Companies and MN Limited Liability Partnerships follow the Form M3 rules. Annual Renewal Required For A Minnesota Limited Liability Partnership Minnesota law requires every Minnesota Limited Liability Partnership to file the Domestic and Foreign Limited Liability Partnership Annual Renewal form annually to confirm registration with the Secretary of State and to keep the LLP status and liability protection. The information is used to identify the Limited Liability Partnership with the state records. This information is available to the public. Due Date 1. Once each calendar year. 2. The renewal must be submitted directly to the Secretary of State by December 31 st. Penalty for Failure to File - Loss of Limited Liability Partnership status. Fee - $155 for expedited service in-person or online; $135 per year if filed by mail. Changes to Partnership Records - The information submitted on this form must agree with the information on file with the Secretary of State. Therefore, if you have made any changes to the business name or address, you must complete a Statement of Amendment or Cancellation along with an additional $135 fee if filed by mail ($155 for expedited or online). Annual Renewal For A Minnesota Limited Liability Company Minnesota law requires every Limited Liability Company to file the Domestic and Foreign Limited Liability Company Annual Renewal form annually to confirm registration with the Secretary of State. The information is used to identify your corporation with the state records. This information is available to the public. Due Date 1. Once each calendar year. 2. The renewal must be submitted directly to the Secretary of State by December 31 st. The Secretary of State is strongly encouraging companies to file their annual renewal online at Chapter 2 10

14 Penalty for Failure to File 1. The corporation loses good standing and possible limited liability protection. 2. If you fail to file, administrative termination will result. There is a fee of $45 for expedited service in-person or online ($25 if submitted by mail) to retroactively reinstate within one year of the date of the termination. Fee - No fee required when filed timely. Changes to LLC Records - The information submitted on this form must agree with the information on file with the Secretary of State. Therefore, if you have made any changes to the business name, registered agent or office address, you must amend your LLC agreement accordingly by filing a Notice of Change of Registered Office/Registered Agent form. This form is available from the Secretary of State s office (651) or online at The cost of filing the form is $55 for expedited service in-person and online filings ($35 if submitted by mail). Annual Renewal For A Minnesota Limited Partnership Minnesota law requires every Limited Partnership to file the Domestic and Foreign Limited Partnership Annual Renewal form annually to confirm registration with the Secretary of State. The information is used to identify your Limited Partnership with the state records. This information is available to the public. Due Date 1. Once each calendar year. 2. The renewal must be submitted directly to the Secretary of State by December 31 st. The Secretary of State is strongly encouraging companies to file their annual renewal online at Penalty for Failure to File 1. The partnership loses good standing and possible limited liability protection. 2. If you fail to file, administrative termination will result. There is a $45 fee for expedited and online filings service in-person ($25 fee if submitted by mail) to retroactively reinstate within one year of the date of the termination. Fee - No fee when timely filed. Changes to LP Records - The information submitted on this form must agree with the information on file with the Secretary of State. Therefore, if you have made any changes to the business name or address, you must amend your LP agreement accordingly by filing a Notice of Change of Registered Office/Registered Agent form. This form is available from the Secretary of State s office (651) or online at The cost of filing the form is $70 for expedited service in-person and online filings ($50 if submitted by mail). Chapter 2 11

15 Minnesota Withholding on Partnerships and S Corporations - Form AWC Partnerships and S corporations must withhold Minnesota income tax on the gross income allocated to non-resident individuals who are partners or shareholders. No Withholding - Nonresident individuals are not subject to withholding if: 1. a composite return is filed by partnership or S corporation (see later in this chapter); or 2. Minnesota distributive income is less than $1,000. Withholding % of the nonresident individual's share of Minnesota source distributive income (or the amount on Form AWC if the individual files an exemption certificate) is to be withheld. Exemption - Form AWC may be completed by a nonresident individual partner or shareholder to request that less than 9.85% of the individual's Minnesota source income be withheld because estimated payments were made or tax was withheld from Minnesota wages. All Forms AWC must be attached to Form M3 or Form M8. Non-Resident Filing Requirements - Nonresident individuals must file a Minnesota tax return if their gross income derived from Minnesota sources exceeds the following: Year Minnesota Composite Income Tax Return Amount 2015 $ 10, $ 10, $ 10,400 Partnerships, S corporations, trusts and estates, distributing current income only, may file a composite return on behalf of one or more of their nonresident individual partners, shareholders or beneficiaries. The electing individuals must not have any Minnesota source income other than the income from the entity or other entities electing composite filing. The composite return is used to report the nonresident individual's Minnesota source income from the entity and remit the corresponding tax. Partnerships and S Corporations are required to remit the Minnesota withholding on Minnesota source income on a quarterly basis during the year. The nonresident individuals included on the composite return do not file Minnesota individual income tax returns (Form M1). Minnesota Real Estate Property Tax Generally, real estate taxes are deductible in the tax year the taxes are paid. However, if a valid election is made, the Minnesota real estate tax may be deducted by ratable accrual. Start-up businesses or other businesses incurring property taxes for the first time must attach an election statement to the return for the first year in which property taxes are incurred. If an election was not made in the first year in which there were property taxes, a change in accounting method must be filed with the IRS. The election does not impact the allocation of property taxes between the buyer and seller in the year of sale of real property. * * * * * Chapter 2 12

16 CHAPTER 3 - MINNESOTA MINIMUM FEE Minnesota imposes a minimum fee on: regular corporations; S corporations; partnerships; limited liability companies; and limited liability partnerships. This fee is in addition to any franchise (income) tax which may be due. Fee Schedule for Tax Years Beginning in 2017 Total Property, Payroll and Sales Factors Is Fee $ Less than $ 970,000 $ 0 $ 970,000 to $ 1,959,999 $ 200 $ 1,960,000 to $ 9,769,999 $ 590 $ 9,770,000 to $ 19,539,999 $ 1,960 $ 19,540,000 to $ 39,079,999 $ 3,910 $ 39,080,000 or more $ 9,770 The above brackets and amounts are indexed for inflation. Property Factor The property factor is comprised of: the average of all tangible property owned in Minnesota during the year computed at cost; and Minnesota rents paid times 8. Payroll Factor The payroll factor is the total of all wages paid in Minnesota. It does not include commissions paid to independent contractors. Sales Factor The sales factor is the total of all receipts from doing business in Minnesota, including rental income. It does not include interest, dividends and sale of assets. The sales factor for a trade or business providing services, will use where the service is received, not where it was consumed, in allocating sales within and outside Minnesota. The factor is determined on only the sales (and rental income) derived in Minnesota. How to Pay The fee is included on the respective tax returns for the entity. Taxpayers need to include the minimum fee in determining estimated tax payments. Exempt Entities Corporations and cooperatives exempt from income tax and farm partnerships are not subject to the minimum fee. This includes exempt organizations subject to income tax on unrelated business income. Apportionment Minnesota only uses sales to determine apportionment. Property and payroll are not considered. * * * * * Chapter 3 13

17 CHAPTER 4 - S CORPORATIONS Introduction When Congress passed legislation creating S corporations, they created a true corporation that acted like a partnership for federal income tax purposes. This was achieved by allowing the shareholders of the S corporation to report the income or loss on their personal tax returns. The income or losses are passed through to the shareholders and taxed to them on their individual returns. The tax rates prior to 1993 favored S corporations because the highest individual rate was less than the highest corporate rate at the time of publication. Today's highest individual tax rate of 39.6% for 2017 (plus a potential 3.8% on net investment income for higher income individuals), exceeds the highest corporate rate (35%). Starting for tax year beginning after December 31, 2017, the top individual federal rate will be 37%, while corporations will be taxed at a flat 21%. For tax years after December 31, 2017, shareholders in a S-Corp can also be entitled to a 20% deduction on their share of qualified business income (QBI) from the S-Corp, which effectively lowers the top marginal federal tax rate for S-Corp income to 29.6% QBI is defined as taxable income from a U.S. trade or business excluding investment income/expenses (i.e. STCG, STCL, LTCG, LTCL, dividends, interest). The 20% deduction is limited to 20% of the shareholder s taxable income adjusted for capital gain income and loss. If the individual shareholder has taxable income in excess of $315,000 for married filing joint or $157,500 for all others, the QBI deduction is limited to the greater of 1) 50% of W-2 compensation paid by the entity or 2) 25% of W-2 compensation paid by the entity plus 2.5% unadjusted basis of assets. For shareholders in a professional service S-Corp (including medical services, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services) the deduction is subject to an income limitation. The 20% deduction is only allowed if taxable income is less than $315,000 (Married Filing Jointly) or $157,500 for all other taxpayers. The deduction phases-out over a $100,000/$50,000 range for taxpayers Married Filing Jointly/Other. Engineers and architects are excluded from the list of professional services. You need to evaluate many factors in deciding whether an S corporation is advantageous. The following chart sets forth a few of the major items and their respective treatment: Item Federal income taxes Minnesota income tax Limitation on number of shareholders Investment restrictions Treatment By S Corporations No tax, except a tax on excess net passive income and certain built-in gains. See Federal and Minnesota Income Tax and Minnesota Minimum Fee chapters. 100 shareholders. S election terminates if the corporation has earnings and profits from a prior C corporation and more than 25% of gross receipts are passive income for three consecutive tax years. Chapter 4 14

18 Item Cash distributions Limitation on deduction of loss pass-throughs Pro rata shares of pass-through items Taxable years Tax treatment of fringe benefits Treatment By S Corporations Distributions are nontaxable to the extent of the shareholder s basis. Distributions exceeding basis are treated as capital gains unless there are accumulated earnings and profits from non S corporation years and the accumulated adjustments account is exhausted. Loss deduction allowed to the shareholder to the extent of adjusted basis of stock owned, plus adjusted basis in debt owed to the shareholder by the corporation. Loss pass-throughs exceeding deductible amounts are carried forward. All items are passed through to all shareholders during the corporation's taxable year on a per-share, per-day basis. Calendar year must generally be used unless corporation can show a valid business purpose for fiscal year. Fringe benefits for more than 2% shareholders are not deductible by an S corporation except health and accident insurance premiums which are additional compensation to the more than 2% shareholderemployees. Why S Corporation Status The following factors should be considered before a corporation elects S status: Advantages no corporate level income taxes except for excess net passive income and built-in gains; ability to pass through to shareholders start-up losses (subject to basis and passive loss rules); lowest tax on the sale of business assets. The sale will be taxed only at the shareholder level (subject to the built-in gains tax); not subject to the corporate alternative minimum tax, personal holding company tax and accumulated earnings tax; unreasonably high compensation to shareholder/employees generally is not an issue with the IRS; ability to distribute earnings on a tax-free basis; ability to minimize Social Security taxes; ability to split income among family members by making children shareholders; the limitations on the use of the cash method of accounting do not apply; can have up to 100 shareholders (members of a family are treated as one shareholder); and may own 80% or more of a C corporation subsidiary, and thus conduct a portion of its business through a controlled subsidiary. Chapter 4 15

19 Disadvantages only one class of stock is allowed (with the exception of restricted bank director stock); outstanding shares of stock must confer identical rights to distribution and liquidation proceeds or it may be determined that more than one class of stock exists. However, different voting rights are allowed; may have to use a calendar tax year; loss of certain fringe benefits for over 2% shareholder/employees; regular C corporations electing S status will have any built-in gains taxed at 35% if the assets are disposed of within 5 years after the election. This will affect: 1. sale of business assets; 2. LIFO inventory recapture; and 3. collection of cash basis receivables. loss of ability to allocate some income outside of Minnesota where sales are made in states other than Minnesota; C corporation net operating loss carryover cannot be used by an S corporation except to offset built in gains, but the 20 year carryover period includes the S election years; and some states do not recognize the S election. Income is taxed both to the corporation and individual. Electing S Corporation Status In order to elect S corporation status, the shareholders file Form 2553 with the Internal Revenue Service. The election must be filed on or before the 15 th day of the 3 rd month of the election year. For example, a calendar year corporation has until March 15 th to file the election. All of the following conditions must be satisfied in order to elect S status: it must be a domestic corporation; the maximum number of shareholders allowed is 100; the shareholders must be individuals, estates, certain types of trusts or certain tax-exempt organizations; no shareholders may be non-resident aliens; and only one class of stock is allowed. Minnesota accepts the federal election. Chapter 4 16

20 Terminating and Revoking the Election An S corporation election remains in effect until it is either terminated or revoked. The corporation must wait 5 years to make a new S election if the S election is terminated or revoked. Any one of the following events will cause the corporation to lose its S status: shareholders owning greater than 50% of the stock agree to revoke the election; the corporation fails to satisfy any of the conditions listed above; or the corporation has accumulated earnings and profits from non S years, and for 3 consecutive tax years derives more than 25% of its gross receipts from passive income sources. If the shareholders determine that they no longer desire S status, they can revoke the election. The revocation is accomplished by filing a consent statement with the Internal Revenue Service. In order to be effective for the beginning of the corporation's tax year, the consent statement must be filed by the 15 th day of the 3 rd month. Unlike Form 2553, which allows the corporation to elect S status, there is no official form for the revocation. The statement must be signed by enough shareholders to account for greater than 50% of the stock ownership. Income and Loss from the Corporation The income or loss from the corporation is passed through to the individual shareholders to be reported on their individual income tax returns. While income items present no special problems for the shareholders, loss items are subject to additional rules in determining how much of the loss is deductible. A shareholder will be limited on the amount of the loss they can deduct to their stock and debt basis. The stock basis is generally the amount of their original investment reduced by cash distributions and adjusted for income and expense items passed through to the shareholders. The debt basis is the amount of money the shareholders directly lend the corporation. At no time can a shareholder deduct as a loss an amount greater than their combined stock and debt basis. Example - On January 1, 2017, John buys stock in an S corporation for $10,000, and lends the corporation $20,000. The company shows a loss for the year 2017, and John's distributive share of the loss is $15,000. Basis in Stock Basis in Debt Original investment $ 10,000 $ 20,000 Net reduction items of $15,000 are applied: 1. against stock basis (10,000) against debt basis -0- (5,000) Basis, end of year -0-15,000 As a result of the above, John will have a basis of $15,000 available for If the corporation has a $20,000 loss for 2018, John would only be allowed to deduct $15,000 of the loss in 2018 and the remaining $5,000 loss would be carried over to Chapter 4 17

21 Minnesota Minimum Fee Minnesota imposes a minimum fee on S corporations. This fee is in addition to any other tax that may be due (see Minnesota Minimum Fee chapter). Non-Resident Shareholder Withholding S Corporations may be required to withhold Minnesota income tax for a non-resident shareholder (see Minnesota Withholding on Partnerships and S Corporations in the Federal and Minnesota Income Tax chapter). State withholding for a non-resident shareholder is considered a cash distribution to the shareholder. Any other shareholders distributions need to be trued-up to ensure proportional distributions. Composite Return for Non-Resident Shareholders Minnesota allows S corporations to file a single (composite) return on behalf of their non-resident shareholders who elect to be included on the composite return. Electing shareholders must not have any Minnesota source income other than the income from this entity and other entities electing composite filing. Filing a composite return relieves the non-resident individuals from filing Minnesota individual income tax returns. Composite tax paid by the S-corporation on behalf of a shareholder is considered a cash distribution. Distributions should be trued-up at year end so that, in combination, composite state tax payments and other distributions are proportional to ownership. * * * * * Chapter 4 18

22 CHAPTER 5 - FISCAL YEAR RULES FOR PERSONAL SERVICE CORPORATIONS, S CORPORATIONS, PARTNERSHIPS AND LIMITED LIABILITY COMPANIES All personal service corporations (PSCs), S corporations, partnerships and limited liability companies (LLCs) are generally required to have a calendar year end. Electing A Fiscal Year End Special rules allow PSCs, S corporations, partnerships, and LLCs to elect to have a fiscal year end. S corporations, partnerships, and LLCs that elect to have a fiscal year end will be required to make refundable tax deposits. PSCs that elect to have a fiscal year end will be subject to deduction limitations. The election is made at the entity level by filing Form The election remains in effect until the entity changes its tax year. Once terminated, such an election may not be made again. These rules do not apply to entities that establish a business purpose for maintaining a fiscal year end. Allowable Tax Years Generally, a new PSC, S corporation, partnership, or LLC may elect a tax year with a deferral period of not more than 3 months. The deferral period, with respect to any tax year, is the number of months between the beginning of such year and the close of the calendar year. For example, an S corporation with a fiscal year end of September 30 th has a 3-month deferral period. An S Corporation may assume a natural tax year (any tax year end) if 25 percent or more of its gross receipts are recognized in the last 2 months of a 12-month period ending with the last month of the requested annual accounting period. The test must be satisfied for the past 3 consecutive 12-month periods. An S Corporation will not meet this test if another accounting period also meets the 25 percent gross receipts test and produces higher percentages than the requested annual accounting period. An existing entity may elect to retain any tax year as long as it is the same as the entity s last tax year beginning after This rule also applies to a former C corporation that elected S status after September 18, 1986 and before January 1, Thus, a June fiscal year C corporation that elected S status for its tax year beginning July 1, 1987 and ending December 31, 1987 may elect to retain the June 30 th fiscal year. An existing entity may also change its tax year at the time of making the election. The change is allowed only if the deferral period is the lesser of three months or the deferral period of the tax year being changed. Accordingly, a partnership with a November fiscal year may not elect to change its tax year to September. However, a partnership with a January fiscal year may elect to change to a September, October or November tax year. Tiered structures may not make an election to have a fiscal year unless all of the entities in the structure are partnerships, LLCs, and S corporations, and they have the same tax year. Therefore, a partnership with PSC partners cannot elect a fiscal year. Deferral Period DEFINITIONS The deferral period is the number of months between the beginning of the fiscal year and the close of the calendar year. Chapter 5 19