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Minnesota requires adjustments to state tax returns for COVID-19 financial relief via M1NC

by Rob Holcomb and Megan Roberts, Extension Educators

On July 1, 2021, the Minnesota legislature made PPP loan forgiveness excludible on the 2020 MN state tax return. This post is now historical information.

If a taxpayer secured a Paycheck Protection Program (PPP) loan in 2020, the forgiveness or potential forgiveness will need to be reported on the 2020 Minnesota income tax return.  This reporting will be done on the 2020 Minnesota Schedule M1NC (Federal Adjustments). The form adjusts for any non-conformity with federal tax law at the Minnesota state level.

The Minnesota Department of Revenue M1NC directs taxpayers under their adjustment directions for the CARES Act Section 1106 Loan Forgiveness: “If you (the taxpayer) claimed Payroll Protection Program loan forgiveness on your federal return, take the amount that was excluded from the gross income for federal purposes and subtract the amount that would have been deductible if you had not claimed the loan forgiveness treatment. Include that amount as a positive number.”

With the passage of new COVID-19 relief legislation on December 21, also known as H.R.133 or the Consolidated Appropriations Act, 2021, taxpayers are no longer required to reduce business expenses on the federal tax return by the amount of PPP loan forgiveness they received or expect to receive in the future. This causes the PPP loan forgiveness to be non-taxable on the federal return but taxable on the Minnesota return.

A Minnesota taxpayer with PPP loan forgiveness starts with PPP forgiveness and then subtracts the amount of reduced expenses from the Federal return.  Since there will be no reduction of expenses on the federal return, the total amount of PPP loan forgiveness is an add back on the Minnesota return, thus increasing Minnesota taxable income.

For sole proprietors or partnerships with no employees, the original PPP loan was calculated based upon owner compensation (pulled from the taxpayer’s 2019 Schedule F or Schedule C). Since owner compensation is not deductible under IRC § 265, the logical thought process is that there is no expense deduction to disallow for an owner draw/owner compensation. This calculation was previously going to put sole proprietors with no employees at a disadvantage on the Minnesota return because these operators would not have any expense reduction to go against the PPP forgiveness. 

With Congress changing the law so that no reduction of deductible expenses is necessary with the forgiveness of a PPP loan, all PPP loan forgiveness will be a taxable event on the Minnesota tax return.

2021 Update: The Minnesota Department of Revenue has issued more concise wording on PPP since we wrote this blog. The new text states, "If you excluded loan forgiveness from your income under the Paycheck Protection Program on your federal return, include the amount of the forgiven loan on line 9 [of the M1NC]." The interpretation of the form remains the same.

This information is educational in nature, and is not tax or legal advice. 

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