A provision in Minnesota's HF2438 lets many retail business owners reduce their federal tax bill by paying tax at the state level instead.
Most Minnesota retail owners don't realize they have an option to reduce their federal income taxes through a state-level election buried in HF2438, the state's taxation and government financing bill. The provision extends a pass-through entity tax mechanism through taxable years beginning after December 31, 2027—and it could mean real money back for eligible businesses.
If you operate as an S-corporation, partnership, or LLC taxed as a partnership, you can elect to have your business pay an entity-level tax to Minnesota at the highest individual state rate: 9.85%. Here's the key benefit: when you pay that state tax, you can deduct it on your federal return without hitting the $10,000 SALT (state and local tax) cap that applies to most business owners.
That cap normally limits how much state tax you can deduct federally. But this election creates a workaround. By paying the tax at the entity level instead of claiming it personally, qualifying owners can deduct the full state tax payment and reduce their federal taxable income directly. For owners with significant pass-through income, this can translate to substantial annual federal tax savings.
This applies to retail businesses structured as:
It does not apply to C-corporations or sole proprietorships. If you're unsure of your business structure, check with your accountant or tax advisor.
The provision is effective retroactively from January 1, 2026. Elections are available for taxable years beginning after December 31, 2020 through the end of 2027. That means you may have the opportunity to file amended returns for prior years if you qualify and want to take advantage of this retroactively.
The extension through 2027 gives you a window to plan. If you've been operating without this election, now is the time to review whether it makes sense for your situation.
This is not automatic. You must affirmatively elect to use this option. The mechanics and eligibility rules are specific, so this is not a do-it-yourself decision. Schedule a conversation with your CPA or tax attorney to determine:
The provision is codified in HF2438, Article 2, Section 9 (Minnesota Statutes 289A.08, subd. 7a), on page 33 of the bill.
This is a legitimate tax planning tool now available through 2027. The difference between knowing about it and not knowing about it could be thousands of dollars annually in federal tax liability.
For a detailed, business-specific overview of this provision and how it may apply to your retail operation, consult with a Minnesota tax professional or your industry association.