A provision in Minnesota's HF2438 allows auto service owners to reduce federal taxes through an entity-level state tax election—but most don't know it exists.
Most auto service owners in Minnesota have never heard of the pass-through entity tax election. That's a problem, because it could save them thousands of dollars annually on their federal tax bill.
Here's what's happening: buried in HF2438, a state taxation and budget bill, is a provision that extends a tax strategy through 2027 and beyond. It's technical, but the practical benefit is straightforward.
If you own your auto service as an S-corporation, partnership, or LLC taxed as a partnership, Minnesota now allows you to make an election to pay tax at the entity level instead of at the individual owner level. The entity pays Minnesota's top individual tax rate—9.85%—on your business income.
That sounds like it costs more. It doesn't, because of federal tax law. When you pay that state tax at the entity level, you can deduct it on your federal return. Here's the key part: that deduction bypasses the $10,000 annual cap on state and local tax (SALT) deductions that limits most business owners.
In practical terms: you reduce your federal taxable income by the full amount of Minnesota state tax paid, without hitting the SALT ceiling. For owners with significant business income, this can mean $5,000 to $15,000 or more in annual federal tax savings—depending on your situation.
This election is available to owners of pass-through entities—the structure most small auto service shops use. If you're a sole proprietor filing Schedule C, this doesn't apply. If you've structured your business as an S-corp, partnership, or LLC, it likely does.
The election is optional. You don't have to participate. But if your federal tax bracket is high enough, the math often works in your favor.
The provision appears in Article 2, Section 9 of HF2438 (Minnesota Statutes 289A.08, subdivision 7a), on page 33. It's effective retroactively from January 1, 2026, and the election is available for taxable years beginning after December 31, 2020 through taxable years beginning after December 31, 2027.
That retroactive date matters: if you filed 2026 returns without making this election, you may have options to amend and reclaim savings.
This isn't a decision to make alone. The election involves both state and federal tax planning, and the math is different for every business owner based on income level, structure, and other factors. Talk to your CPA or tax advisor about whether electing the pass-through entity tax makes sense for your shop.
The window to benefit from this provision extends through 2027, but that's not forever. If you think it might apply to you, don't wait until year-end to explore it.
For a detailed, business-specific guide to this provision and how it may affect your auto service, consult your tax professional or contact your state trade association.