Minnesota Pass-Through Entity (PTE) Tax Election

Is the Minnesota PTE election available right now?

Yes. The Department of Revenue confirms the election is available for tax years beginning after December 31, 2020, and before January 1, 2028, so it runs through tax year 2027. This is a reversal of the path the statute was on a year ago, so the mechanics are worth tracing.

The PTE statute, Minn. Stat. § 289A.08, subd. 7a, contained a built-in expiration clause tying it to the federal SALT-cap statute. By its terms, the subdivision “expires at the same time and on the same terms as section 164(b)(6)(B) of the Internal Revenue Code.” Under the law in effect through May 2026, that reference doomed the election rather than insulating it: Minnesota used static conformity to the Code “as amended through May 1, 2023,” federal § 164(b)(6)(B) was then scheduled to sunset after the 2025 tax year, and read against the frozen conformity date the Minnesota election was set to expire for tax years beginning after December 31, 2025.

Two developments broke that chain. First, on the federal side, the One Big Beautiful Bill Act of 2025 (Pub. L. 119-21, signed July 4, 2025) struck the “before January 1, 2026” cutoff from § 164(b)(6), so the federal SALT-deduction limitation continues rather than expiring after the 2025 tax year. Second, on the state side, the 2026 Minnesota omnibus tax bill (2026 Minn. Laws ch. 128, enacted as HF 2438), signed by Governor Walz on May 27, 2026, advanced Minnesota’s IRC conformity date from May 1, 2023, to May 1, 2026, and separately re-enacted and extended the PTE election retroactive to January 1, 2026, through taxable years beginning before January 1, 2028. The result: the election is available for the 2026 and 2027 tax years and now expires only for taxable years beginning after December 31, 2027.

A standalone re-enactment bill (HF3127 and its Senate companion SF3405) ran earlier in the session but did not pass on its own; its substance was folded into the omnibus bill. The 2026 omnibus law (Chapter 128, Article 2, Section 9) amended Minn. Stat. § 289A.08, subd. 7a, to carry the extension into law, so the question is settled rather than stalled. The practical endpoint is tax year 2027. According to the Department of Revenue, the 2026 bill “extends the Minnesota Pass-Through Entity (PTE) Tax through the 2027 tax year,” and the “Minnesota PTE Tax will expire for taxable years beginning after December 31, 2027.” The Minnesota Department of Revenue separately confirms the election is available for tax years beginning before January 1, 2028. The Department of Revenue states that for calendar-year filers the election must be made by the entity’s extended due date, September 15, 2026. One caution on the codified text: the published primary sources do not yet agree on the exact expiration language in the amended subdivision (some show the IRC § 164(b)(6)(B) cross-reference retained, another shows a fixed “after December 31, 2029” clause), so the controlling 2027 Minnesota endpoint should be read from the Department of Revenue’s guidance and the 2026 session law’s applicability provisions rather than from the cross-reference standing alone, and re-confirmed against the codified section once it is updated. Given how recently and how dramatically this law has changed, the election is worth re-confirming each year against the then-current Department of Revenue guidance rather than treated as permanent.

What problem does the PTE election solve?

The election is a response to the federal cap on individual state-and-local-tax deductions. Owners of a pass-through entity who pay Minnesota tax at the individual level have that tax deduction capped on Schedule A of their federal return, because the SALT limitation under IRC § 164(b)(6) applies “in the case of an individual.” Owners of a C-corporation do not have the same problem: by its terms § 164(b)(6) applies only “in the case of an individual,” so the cap does not reach a corporation, and separately the limitation in section 164(b)(6) does not reach state and local taxes paid or accrued in carrying on a trade or business. The PTE election lets a partnership or S-corp move the state-tax payment to the entity’s books, where it is generally deductible without the individual cap, while preserving pass-through treatment for everything else.

One currency note on the federal side. As amended by the One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025), the SALT cap is no longer a flat $10,000. The “applicable limitation amount” is $40,000 for 2025 and $40,400 for 2026, rising roughly one percent per year through 2029, then reverting to $10,000 for taxable years beginning after December 31, 2029, with a phasedown of 30 percent of modified adjusted gross income over a threshold of $500,000 in 2025 (indexed to $505,000 for 2026 and rising about one percent per year), floored at $10,000. The higher cap means more of an itemizing owner’s state tax is federally deductible during 2025 through 2029, which sharpens rather than blunts the value of the entity-level workaround.

The structural move is straightforward. The entity computes a pass-through entity tax on the owners’ allocable income, pays it to Minnesota with the entity’s return, and deducts it as a state-and-local tax on the entity’s federal return. That deduction reduces the federal taxable income that flows to the owners on their K-1s. At the state level, Minnesota offsets the duplicate taxation by giving each owner a credit equal to the share of entity-level tax attributable to that owner.

The IRS endorsed this design in Notice 2020-75. The Notice defines a “Specified Income Tax Payment” (a state income tax imposed on and paid by a partnership or S corporation) to include such a payment “without regard to whether the imposition of and liability for the income tax is the result of an election by the entity,” and it provides that the entity is allowed a deduction for the payment in computing its taxable income for the year of payment. Taxpayers may rely on the Notice. Minnesota’s statute is built to fit inside that federal blessing, and the 2025 reconciliation act preserved it: although an earlier House proposal would have limited entity-level PTE deductions for service businesses such as law and accounting firms, no such restriction was included in the One Big Beautiful Bill Act.

Which entities qualify for the PTE election?

The election is available to qualifying entities under § 289A.08, subd. 7a. In practical terms, that means a partnership, an S corporation, or an LLC taxed as a partnership or S corporation. The statute defines a “qualifying entity” as “a partnership, limited liability company taxed as a partnership or S corporation, or S corporation” with at least one qualifying owner, and it excludes a publicly traded partnership. A single-member LLC disregarded for federal tax purposes does not qualify, because a disregarded LLC is by definition not taxed as a partnership or S corporation and so falls outside the qualifying-entity definition. An LLC that has elected C-corporation treatment likewise does not qualify, because it is a corporation paying its own corporate tax already.

The owner-side eligibility rules are equally important. A qualifying owner is a resident or nonresident individual or estate that is a partner, member, or shareholder of a qualifying entity; a resident or nonresident trust that is a shareholder of a qualifying entity that is an S corporation; or a disregarded entity whose single owner is itself a qualifying owner. An LLC owned by another multi-member LLC, a partnership owned by a partnership, or an S-corp owned through a corporate parent will fail the qualifying-owner test as to those tier-one owners. The presence of a single ineligible owner does not necessarily disqualify the entity, but it does shrink the pool of owners on whose behalf the entity-level tax can be computed.

Two practical filters cover most cases. If your entity is taxed as a partnership or S-corp federally, and your owners are people (or their grantor trusts), you are likely eligible. If your entity has corporate, partnership, or LLC owners in the cap table, eligibility needs an attorney-and-CPA review before the election is made. For background on how Minnesota classifies different entity types and the tax treatment that follows from each, see Types of Minnesota business entities and tax implications.

How is the PTE election actually made?

The election is made on the entity’s pass-through entity tax return, on or before the due date or the extended due date of that return. The statute requires that the election “may only be made by qualifying owners who collectively hold more than 50 percent of the ownership interests in the qualifying entity held by qualifying owners,” and once made, the election “is binding on all qualifying owners who have an ownership interest in the qualifying entity.” The election is annual, and once filed for a tax year, it “is irrevocable for the taxable year.”

Three operational details matter. First, the election is per-entity-per-year; each year is a fresh decision, and the entity is not locked into a multi-year commitment. Second, the more-than-50-percent threshold is on the qualifying-owner pool, not the total cap table; if 70 percent of equity is held by qualifying owners and the rest by an ineligible LLC, the threshold runs against the 70 percent. Third, the binding effect on all qualifying owners means a 51 percent majority can pull a 49 percent dissenter into the election, which makes operating-agreement and shareholder-agreement language about tax elections worth checking before filing.

In my practice, the most common filing slip is treating the election as a checkbox on the federal return rather than as a Minnesota return mechanic. The election is made on the Minnesota Schedule PTE filed with the entity’s Minnesota return (Form M3 for partnerships, Form M8 for S corporations). Federal partnership (Form 1065) and S-corporation (Form 1120-S) returns do not contain a Minnesota PTE election, and federal-only filers regularly miss the state-level form.

What is the PTE tax rate and how is it computed?

The PTE tax is imposed at “the highest tax rate for individuals under section 290.06, subdivision 2c,” which is currently 9.85 percent. The entity applies that single rate to each qualifying owner’s PTE taxable income, then sums the owner-level amounts to produce the entity’s PTE tax. The base is the owner’s allocable share of Minnesota-source pass-through income, modified by Minnesota additions and subtractions that would otherwise apply at the owner level.

The choice of the top individual rate, rather than a graduated schedule, is a Minnesota policy decision, not a federal condition. Notice 2020-75 sets no requirement about the rate; it asks only that the tax be an income tax imposed directly on, and paid by, the entity, and it allows the deduction “without regard to whether” the tax is elective or the owners receive an offsetting credit. Minnesota’s use of the top rate does mean the entity tax can be slightly higher than what the owners would have paid individually if some owners are in lower brackets. The federal SALT deduction usually offsets that excess, but not always; modeling matters.

If your entity has not yet finalized whether to be taxed as a partnership or as an S-corporation, that classification choice precedes the PTE analysis; see Can you convert an LLC to an S-corp? Pros and cons for the upstream decision. A separate base computation applies to net investment income that flows through to the owners: under the statute, a qualifying owner’s net investment income tax liability “must be computed under section 290.033” (Minnesota’s net investment income tax). For most operating LLCs, the operating-income base dominates. For investment partnerships and family LLCs holding portfolio assets, the separate computation is the bigger figure.

How does the PTE owner credit work?

Owners of an electing entity claim a credit against their Minnesota individual income tax under Minn. Stat. § 290.06, subd. 40. The statute reads: “A qualifying owner of a qualifying entity that elects to pay the pass-through entity tax under section 289A.08, subdivision 7a, may claim a credit against the tax due under this chapter equal to the amount of the owner’s tax liability as calculated under section 289A.08, subdivision 7a, paragraph (d).” The credit is reported on Schedule M1REF for individual owners and Form M2 for estate and trust owners; the entity furnishes a Schedule PTE (and Schedule PTE-RP for resident partners on partnership-level returns for 2023 and forward) showing each owner’s allocable share. Like the election itself, the owner credit was extended for tax years beginning before January 1, 2028, by the 2026 tax law.

The credit’s refundability matters. Because it is refundable, an owner whose total Minnesota tax liability is less than the share of entity-level tax attributable to that owner can recover the excess as a refund on the individual return. There is one important guardrail: under Minn. Stat. § 289A.08, subd. 7a, once an owner claims the credit, the entity itself “cannot receive a refund” for the same tax, and any refund “must be claimed in conjunction with a return filed by the qualifying owner.” The refund-claim path runs through the owner, not the entity.

For owners who pay tax to other states on the same income, an additional layer applies. Minnesota also provides a credit, allowed against the tax imposed on a qualifying entity, for pass-through entity tax paid to another state, which prevents double-state-taxation when an entity has activity in Minnesota plus PTE-electing activity in a sister state. That credit is itself tied to the federal SALT-cap sunset and was extended along with the election for taxable years beginning before January 1, 2028. The mechanics are administratively complex; for multi-state pass-throughs, the CPA models both directions before deciding whether to elect in each state.

How does the PTE election interact with estimated payments?

A qualifying entity that elects the PTE tax pays estimated tax in the manner prescribed for composite estimated tax. Under Minn. Stat. § 289A.25, individuals, trusts, S-corporations, and partnerships pay estimated tax in four installments through the year (due April 15, June 15, September 15, and January 15 of the following year), with a safe harbor equal to the lesser of 90 percent of the current year’s tax or 100 percent of the prior year’s tax (110 percent if prior-year adjusted gross income exceeded $150,000). The same architecture applies to the entity-level PTE tax: the entity pays in throughout the year, not in a lump sum at filing. (For 2026 specifically, the Department of Revenue has set out estimated-payment guidance for the reinstated election, including a four-equal-installment requirement.)

For loss years and substantially-reduced-income years, the safe-harbor computation can produce a small or zero estimated-payment requirement. For high-income years, the entity needs cash on hand to fund the quarterly installments, which is a working-capital point that often gets missed when ownership groups also draw distributions to fund their personal estimates. The cleanest approach is to coordinate the entity’s PTE estimates with the owners’ personal Minnesota estimates so the entity is not double-funding state tax for the year. Model first, fund once.

The interaction with the owner-level obligation is set by statute. When an owner’s income is subject to the PTE tax, the owner’s liability to pay Minnesota estimated tax on that income “is . . . satisfied when the qualifying entity pays estimated tax in the manner prescribed in section 289A.25 for composite estimated tax.” The owner does not separately pay quarterly individual estimates on that same income, and does not wait for the entity’s annual return to resolve it. Separately, the owner claims the refundable credit for that tax on the annual return under Minn. Stat. § 290.06, subd. 40. One administrative wrinkle: estimated payments cannot be transferred between an individual’s tax account and the entity’s PTE account, so owners running tight personal estimated-payment cushions adjust them down for the year of an election to avoid stacking entity-level and individual-level estimates on the same income.

How does the PTE election affect nonresident owners?

Nonresident-owner mechanics are where the PTE election earns its operational complexity. Two specific points come up repeatedly. First, a nonresident qualifying owner whose only Minnesota source income is from the electing entity may have his or her Minnesota individual filing obligation satisfied by the entity’s PTE return, which functions as a composite filing for that limited fact pattern. The owner avoids a separate Minnesota return. By statute, if it is later determined that the nonresident owner has other Minnesota source income, the PTE return “will not constitute a return to satisfy” that owner’s filing requirement, so the owner with other Minnesota income (rental property, a separate K-1, separate consulting work) still files individually.

Second, the credit-mechanic value to a nonresident owner can also turn on how the owner’s home state treats the Minnesota entity-level tax, a planning consideration the Minnesota statute does not address and that varies state by state. Confirm the home-state treatment with the owner’s CPA before relying on it, because it can flip the analysis from “make the election” to “skip the election” for entities with significant nonresident ownership in unfavorable states. In my experience, this is one of the most-overlooked variables in PTE planning. Resident-only ownership groups model cleanly; mixed-state ownership groups model carefully.

Third, an additional credit applies when an entity pays PTE tax to other states. Under Minn. Stat. § 290.06, subd. 23a, a credit is allowed against the entity-level PTE tax for pass-through entity taxes paid to another state, though by statute that credit “may only be claimed by a qualifying owner.” Multi-state operating partnerships frequently end up making the election in more than one state and reconciling the credit interactions on each state’s entity return.

Should I make the PTE election?

The election is available for the year (see the first H2), so the decision is a model-it question, not a default. The basic case for making it: an owner in the top federal bracket, with a meaningful share of pass-through income that would otherwise produce a SALT-capped state-tax deduction at the individual level, gets a real federal-tax benefit from moving the state tax to the entity. The basic case against: a low-bracket owner, an owner whose individual SALT deduction would not be capped anyway, or a nonresident owner whose home state will not honor the Minnesota entity-level tax with a credit.

Three variables move the model the most. First, the projected mix of owner residency states (all-Minnesota is simplest; multi-state requires home-state-by-home-state analysis). Second, the projected Minnesota-source pass-through income for the year (the bigger the number, the bigger the federal SALT-cap escape). Third, the entity’s cash position for funding entity-level estimates without disrupting distribution rhythms. About half of the PTE elections I review are clear go-decisions on the math; the remainder are close calls that depend on owner-specific facts the entity-level analysis cannot see.

For owners running a midsized business considering whether the PTE fits inside a broader tax-strategy stack, see Six categories of tax strategies for midsized businesses for the wider context. Two practical reminders close the analysis. The election is irrevocable for the year, so it is not a midyear hedge against changes. And the entity-level minimum fee under Minn. Stat. § 290.0922 is a separate Minnesota tax, scaled to property, payrolls, and sales, that applies to S-corps and partnerships regardless of the PTE election; the PTE election does not eliminate or reduce the minimum fee. Owners weighing the federal benefit against the entity-level paperwork sometimes forget the minimum-fee item is already in their Minnesota baseline.

The Minnesota PTE election is the kind of decision that pays for the planning time when the federal-state interaction is modeled cleanly and costs more than it saves when the election is treated as a default. The 2026 tax law set the practical Minnesota endpoint at tax year 2027, with the PTE tax expiring for taxable years beginning after December 31, 2027 per the Department of Revenue and the 2026 session law; with a fixed sunset on the books and the possibility of further legislation, the election is worth re-confirming each year against the then-current Department of Revenue guidance. For a second set of eyes on whether the election fits your entity, your ownership group’s residency mix, and your federal-tax posture, email [email protected] with a brief description of the entity, its owners, and a recent K-1. More on tax topics at our Minnesota tax law hub.