Minnesota Extends Pass-Through Entity Tax Through 2027: Key Developments from the 2026 Tax Bill
In the final hours of Minnesota’s 2026 legislative session, lawmakers approved a comprehensive tax bill that includes several significant tax provisions affecting businesses and individual taxpayers throughout the state. The legislation passed with broad bipartisan support, clearing the House by a vote of 126-8 and the Senate by a vote of 52-15 shortly before adjournment on Sunday May 17th. Governor Tim Walz is expected to sign the bill into law.
For many Minnesota business owners, advisors, and pass-through entities, the most consequential provision is the extension of the Minnesota Pass-Through Entity Tax (PTET). The extension provides critical certainty for Partnerships, S-Corporations, and qualifying LLC’s that have relied on the election as a workaround to the federal limitation on the deduction for state and local taxes (SALT cap).
The bill also includes several federal conformity provisions intended to align Minnesota’s tax code with recent federal tax law changes enacted under the One Big Beautiful Bill Act (OBBBA). While those conformity provisions are important, the PTET extension remains the centerpiece of the legislation from a business tax planning perspective.
Minnesota PTET Extended Through December 31, 2027
Under prior law, Minnesota’s PTET election was scheduled to expire for tax years beginning after December 31, 2025. The scheduled sunset created significant uncertainty for pass-through businesses and their owners, particularly given the continued applicability of the federal SALT deduction limitation under Internal Revenue Code Section 164(b)(6).
Minnesota’s tax bill extends the Minnesota PTET through December 31, 2027, and importantly, the extension is retroactive to January 1, 2026. This retroactive effective date is particularly important because many taxpayers had already begun evaluating whether the election would remain available for 2026 tax planning purposes.
The extension preserves Minnesota’s participation in the now widely adopted state PTET framework that has been implemented across much of the country following IRS Notice 2020-75. That guidance effectively confirmed that state-level entity taxes imposed on pass-through entities are deductible at the entity level for federal income tax purposes and are not subject to the individual SALT deduction cap currently imposed on individual taxpayers.
For owners of profitable pass-through businesses, the practical benefit can be substantial. Without the PTET election, many individual owners would continue to face the $10,000 federal limitation on deductions for state and local taxes. By allowing the entity itself to pay Minnesota income tax at the entity level, the PTET structure generally permits the business to deduct the tax federally as an ordinary business expense, thereby restoring a federal deduction that otherwise could be lost.
The extension is therefore welcome news for many Minnesota Partnerships and S-Corporations that have incorporated PTET elections into their broader tax planning strategies over the past several years.
Estimated Payment Relief for First Quarter 2026
Recognizing the uncertainty created by the delayed legislative action, the bill also includes targeted estimated tax payment relief for taxpayers that did not make first-quarter 2026 PTET estimated payments.
Specifically, no penalties will be assessed for failure to make the first-quarter 2026 estimated PTET payment provided the missed first-quarter amount is paid together with the second-quarter estimate and the second-quarter payment is made timely.
This relief provision is important because many taxpayers reasonably delayed making first-quarter PTET estimates while awaiting legislative action on the extension. Prior to passage of the bill, guidance from the Minnesota Department of Revenue had indicated that the PTET election would no longer be available for tax years beginning after December 31, 2025.
As recently as late 2025 and early 2026, the Department’s published materials stated that the PTET had expired under existing law. Taxpayers therefore faced a difficult choice regarding estimated payment obligations while the Legislature debated whether to extend the regime. The penalty relief provision appropriately acknowledges the uncertainty created during the legislative process.
Why the PTET Extension Matters
The extension of Minnesota’s PTET remains highly significant for closely held businesses and their owners for several reasons.
First, the PTET election continues to provide a meaningful federal tax benefit in an environment where the federal SALT deduction limitation remains in place. Although there continues to be ongoing federal discussion regarding possible changes to the SALT cap, no permanent federal repeal has been enacted to date. As a result, state PTET regimes remain one of the most effective planning tools available to owners of pass-through businesses in high-tax and moderate-tax jurisdictions alike.
Second, the extension provides near-term certainty for tax planning purposes. Many businesses have structured owner distributions, quarterly estimates, and overall tax planning assumptions around continued PTET availability. A lapse in the election would have created additional complexity and potentially increased federal tax costs for many owners.
Despite the positive development, however, the extension is temporary rather than permanent. The current legislation extends the PTET only through the end of 2027. As a result, uncertainty may once again emerge during future legislative sessions unless a longer-term solution is adopted.
Several professional organizations, including the Minnesota Society of CPA’s, have publicly advocated for making the PTET permanent. According to legislative commentary surrounding the bill negotiations, permanent PTET treatment is expected to remain a priority issue during the 2027 legislative session.
Federal Conformity Provisions Included in the Bill
In addition to the PTET extension, the Minnesota tax legislation includes several important federal conformity provisions intended to align Minnesota law with recent federal tax changes.
Among the notable conformity items included in the bill are:
• Section 179 expensing conformity
• Bonus depreciation conformity
• Business interest expense limitation adjustments
• Section 174 research and experimental (“R&E”) expensing conformity for pass-through entities
The Section 174 conformity provision deserves particular attention. The bill allows conformity for pass-through entities but does not extend the same treatment to C-Corporations. As a result, Minnesota remains decoupled from federal Section 174 treatment for C-Corporation taxpayers.
This distinction may create additional complexity for businesses operating through multiple entity structures or corporate groups that include both pass-through and corporate entities.
The inclusion of federal conformity provisions is especially important because Minnesota historically has not automatically conformed to all federal tax law changes. Businesses and tax advisors therefore often must navigate differences between federal and Minnesota taxable income calculations. The conformity measures included in this bill should reduce some of that complexity for many taxpayers.
Legislative Negotiations and Future Tax Policy Considerations
The PTET extension became intertwined with broader legislative negotiations during the final weeks of the session. While the ultimate bill received overwhelming bipartisan support, lawmakers considered numerous additional tax proposals that ultimately were not included in the final legislation.
Several controversial proposals opposed by the MNCPA and other business organizations failed to advance this year but are expected to resurface during the 2027 legislative session. These proposals reportedly included:
• Expansion of Minnesota sales tax to professional services, including accounting and consulting services
• A social media tax
• A digital advertising tax
• Creation of a new fifth-tier individual income tax bracket
• A wealth tax
The exclusion of these proposals from the final bill suggests that the enacted legislation ultimately reflected a more restrained approach than some policymakers initially advocated. Nevertheless, the breadth of proposals introduced during the session indicates that Minnesota’s broader tax policy debates are likely far from settled.
Businesses should therefore continue monitoring developments closely heading into future legislative cycles, particularly as the state again approaches the 2027 PTET sunset date.
Planning Considerations for Taxpayers
Taxpayers that previously benefited from the Minnesota PTET election and are impacted by the extension should begin coordinating and planning for their 2026 state estimated payments. Although the extension provides welcome clarity, businesses should ensure they understand the procedural requirements for making valid elections and timely estimated payments. We are here to assist you with any questions you may have, and we will work with you to discuss your business’s required state estimates for 2026.
In addition, taxpayers should carefully evaluate how the Minnesota PTET interacts with elections and filing positions in other states. Multi-state businesses often face complex allocation, credit, and resident state credit considerations when participating in multiple PTET regimes.
Businesses operating as C-Corporations should also review the impact of Minnesota’s continued nonconformity with federal Section 174 expensing rules. Differences between federal and state treatment may require additional state adjustments and deferred tax calculations.
Finally, taxpayers should remain mindful that the current PTET extension remains temporary. Long-term planning assumptions should therefore account for the possibility that additional legislative action may again be required before the end of 2027.
Moving Forward
Minnesota’s 2026 omnibus tax bill delivers an important and much-anticipated extension of the state’s Pass-Through Entity Tax regime through December 31, 2027. The retroactive extension, combined with estimated payment penalty relief, provides meaningful certainty and flexibility for partnerships, S corporations, and qualifying LLCs that rely on the election as part of their federal and state tax planning strategies.
The legislation also advances several federal conformity measures that will affect business taxpayers across the state, particularly with respect to depreciation, interest expense limitations, and Section 174 research expenditures.
While the bill represents a significant victory for pass-through businesses and tax practitioners advocating for continuation of the PTET framework, the extension remains temporary. As a result, Minnesota taxpayers should expect PTET permanence and broader business tax policy debates to remain central topics during future legislative sessions.
