PTE option expires, leaving Minnesota sub S bank shareholders wondering

Two-thirds of the banks in the State of Minnesota have made an S corporation election, which means they are eligible to exercise the state’s Pass Through Entity election..Under the election, the S corporation—not the shareholder—pays the state tax which generally results in a lower federal tax bill for the shareholder given the corresponding deduction on the federal return. As this issue goes to press, however, the PTE election in Minnesota expired year-end 2025, thus clouding taxpayers’ first quarter estimated payment obligation on April 15.Like many states, Minnesota enacted a PTE election option five years ago. But at the time, the Legislature authorized the election only through 2025. It has not renewed the election option so it is no longer available, at least for now. There is speculation that the legislature will reimplement it, either during the current session, or perhaps in a special session if one is called after the session’s mandatory conclusion date of May 18.Here’s how we got to this point. The 2017 Tax Cuts and Jobs Act capped the deduction taxpayers could take against the payment of state and local taxes at $10,000. Previously, there was no cap on the so-called SALT deduction. Because C corp taxes are paid at the entity level, C corp owners benefited from a full SALT deduction, while S corp owners, who pay at the individual level, are subject to the cap, which in many cases increased the size of their tax obligation.About 35 states, including Minnesota, Wisconsin, Iowa, and Illinois, responded by creating pass through entity laws, which give such enterprises the opportunity to pay the state tax and qualify for the full federal SALT deduction. Owners of businesses that exercise the PTE election receive an offsetting income tax credit, so their combined individual and business-level state tax bill stays the same. My hope is the rules go back to the way they were as soon as possible, as they would seem to benefit both the taxpayer and the state. It does result in lower tax revenue for the federal government, but my sense is Uncle Sam will get his due when it’s all said and done one way or another.