New Minnesota Tax Law Changes: Key impacts for businesses and individuals

Minnesota recently passed a new tax bill (HF 2438) that updates how state taxes are calculated beginning in 2026. The bill has been approved by the legislature and was signed into law on May 27, 2026.

While this alignment brings Minnesota closer to current federal law, the bill also introduces additional Minnesota specific adjustments that may increase the complexity of both individual and business filings. Many existing state
differences will remain unchanged, including adjustments for bonus depreciation, state income tax addbacks, and certain foreign income items.

Individual taxpayers will continue to see several areas where Minnesota is different from federal law:

• Dependent care benefits will continue to follow the prior Minnesota rule at $5,000 and not the $7,500 in the
  recent federal expansion.
• Deferral of gain from qualified Opportunity Zone investments is not allowed for Minnesota purposes.
• Charitable contribution deductions are subject to a more restrictive limitation (only contributions in excess of
  1% of adjusted gross income are deductible, compared to 0.5% federally).
• There are also some favorable changes for individuals. The bill provides a one-time increase in property tax refunds for 2026, and Minnesota is developing a free online tax filing system, expected to be available beginning in 2027.

For business owners and pass-through entities, the bill extends the pass through entity (PTE) tax election through 2027, which continues to be an important planning tool to mitigate federal SALT limitations. The most notable pieces included Section 179 and bonus depreciation. However, similar to individuals, businesses will be required to add back certain items that are excluded at the federal level - such as certain Opportunity Zone gains and other deductions - which may increase Minnesota taxable income.

A significant change affecting many businesses relates to research and development (R & D) expenses. For C Corporations, Minnesota requires partial addbacks of federal R & D deductions, creating a timing difference between
federal and state treatment. This may result in higher Minnesota taxable income in the short term, with deductions recovered over time. In contrast, pass-through entities and individuals generally conform to the federal treatment allowing for immediate expensing.

The bill also includes targeted tax credits - particularly for certain agricultural and energy-related activities - and extends or expands some existing incentives. While these provisions may benefit some taxpayers in specific industries, they are not broadly applicable.

Overall, the key takeaway is that Minnesota has updated its conformity to date to more current federal law while continuing to selectively differ from certain provisions. This results in differences that should be considered in tax
planning.

NEXT STEPS

• Reviewing your 2026 tax projections
• Reevaluating planning strategies (such as the PTE election)
• Making any initial estimated tax payments with your second quarter payment if needed
• Considering how these changes may affect charitable giving and investment decisions
  

If you would like assistance evaluating how these changes apply to your specific situation and identifying tax-planning opportunities, please don't hesitate to reach out to our team to connect you to one of our partners at Abdo.