A provision in Minnesota's latest tax bill gives pass-through business owners a way to reduce federal taxable income—but only if they know it exists and act.
Most Minnesota manufacturing owners don't realize they may have access to a federal tax deduction that could save tens of thousands of dollars annually per owner. The opportunity exists because of a pass-through entity tax election embedded in HF2438, the state's recent taxation and government financing bill.
Under Article 2, Section 9 of HF2438 (codified in Minnesota Statutes 289A.08, subd. 7a), S-corporations, partnerships, and LLCs taxed as partnerships can elect to pay an entity-level tax directly to Minnesota at the highest individual income tax rate: 9.85%.
Here's why that matters federally: When a pass-through entity pays this state tax, qualifying owners can deduct that payment on their federal tax returns. Critically, this deduction is not subject to the $10,000 federal SALT (state and local tax) cap that limits most business owners' deductions. That cap has made state tax deductions nearly worthless for many high-income business owners since 2017.
By paying the entity-level tax instead, owners effectively convert a capped deduction into an uncapped one—reducing their federal taxable income dollar-for-dollar, regardless of the SALT limit. For owners in the 37% federal tax bracket, that can mean a federal tax savings of roughly 37 cents for every dollar of Minnesota tax paid at the entity level.
This election is available to pass-through entities—the most common business structures among mid-sized manufacturers. It does not apply to C-corporations, which already pay corporate-level tax.
The benefit is largest for owners with substantial income and federal tax liability. Owners in lower federal brackets will see proportionally smaller savings.
The election became available retroactively for taxable years beginning after December 31, 2020. The provision has been extended through taxable years beginning after December 31, 2027—meaning the election remains available for 2026, 2027, and 2028 tax years.
Because the election is retroactive to 2021, some owners may be able to amend prior returns to claim this benefit for earlier years, though that depends on individual circumstances and filing deadlines.
If your manufacturing business is structured as an S-corp, partnership, or partnership-taxed LLC, discussing this election with your tax advisor or CPA is worthwhile. They can model whether the election makes sense for your specific situation—it's not automatic, and it requires an affirmative choice.
The election must be made according to procedures set by the Minnesota Department of Revenue. Because the window extends only through 2027, waiting to explore this is not advisable.
For a detailed, business-specific overview of how this provision works and whether it applies to your situation, consult your tax professional or contact the Minnesota Department of Revenue.