For Minnesota businesses, much riding on state tax code rewrite

Minnesota businesses with hundreds of millions of dollars at stake, and the prospect of a nasty tax filing season next year, are watching anxiously as state lawmakers and Gov. Mark Dayton figure out what to do with the state's tax system.

Real estate developers, farmers and multinational corporations all stand to gain or lose depending on what the Republican-controlled Legislature and DFL governor wind up doing — or not doing — before lawmakers adjourn in a week.

In the wake of the largest federal tax overhaul in 30 years, passed late last year and signed by President Donald Trump, the Legislature has to make changes to the state tax code — which is chained to federal tax rules — or thousands of businesses will face a confusing mess next year at tax time.

Just one example: The federal tax overhaul allowed far more businesses to use a simpler, more flexible accounting system. But the Legislature must act to enable firms to do the same for their state taxes. If state lawmakers don't do that, businesses would have to keep two sets of books with two different accounting systems.

"A nightmare" is how Mark Bakko, a partner and tax law expert at accounting firm Baker Tilly, described the situation if the Legislature does not act on this seemingly arcane provision.

And there are loads of other measures that have high stakes for firms of all shapes and sizes.

Minnesota businesses, replete with an army of lobbyists and campaign cash, are not shy about using their muscle at the Capitol in St. Paul, but they are also at the mercy of a complex political situation. With the fall elections just months away, both Dayton and the Legislature are focused on making sure the federal tax overhaul does not lead to state tax hikes on families and individuals — and they are looking to businesses to help subsidize that effort.

"It puts the state at huge litigation risk," said Beth Kadoun, tax lobbyist for the Minnesota Chamber of Commerce.

On the flip side, the compromise tax bill between the GOP House and Senate, struck Friday night, would lower the corporate income tax. A Senate plan to reduce estate taxes has been shelved, at least for the time being. Dayton and DFL lawmakers attacked the proposals as an unnecessary giveaway to moneyed and corporate interests.

Dayton and the GOP majority in the Legislature are in agreement on some items that would align the state tax code with the new federal law.

To the surprise of many tax experts, the federal law expanded the pool of eligible companies that can operate using what's called a cash accounting method rather than accrual accounting. Cash accounting is both more flexible and simpler.

Now, companies with less than $25 million in revenue can wait and pay taxes to the IRS when they actually get paid and have the cash on hand.

A bank isn't going to lend a small business that kind of money, however, which is why the cash accounting system helps them out, said Bakko, the tax accountant.

Dayton and Republican lawmakers both want to adopt the federal law, a welcome move in the business community.

Despite their agreement on this and other issues, however, Dayton and Republican legislative leaders are in the middle of a brutal negotiation over not just taxes, but also education spending and contentious policy fights like the minimum wage, sexual harassment and environmental protection. The end deal is often an intricate puzzle that's hard to piece together, but in recent years, relations between Dayton and the Legislature have soured badly at the end of multiple sessions.

Bakko warned of serious consequences if politicians cannot come to agreement on issues like the accounting rules.

All the national tax software would have to be rewritten to factor in Minnesota's specifications, Bakko said. "When a smaller state like Minnesota doesn't conform, it makes the cost of business much more expensive," he said.

Currently, Minnesota caps its 179 expense provision at $25,000 a year, based on an old law.

"Equipment costs are a lot more expensive than they were back in the day," said Tom Haag, a farmer in Eden Valley and Minnesota Corn Growers Association board member. "We hope Minnesota matches or at least gets much higher."

Farms have gotten bigger, and so has the equipment. Haag said a brand-new tractor that pulls farm implements — like a till — can cost $450,000. "And that's just one piece."

The agreement between the GOP House and Senate, as well as Dayton, proposes that Minnesota follow the federal government's lead on Section 179 expensing.

Other provisions would undoubtedly hurt some businesses.

Like the old federal law, Minnesota's current law lets businesses deduct 100 percent of their interest. This allows companies to leverage more debt — rather than depend on actual money in the bank — to run their business.

The new federal law seeks to reduce overleveraged companies, often considered riskier, by limiting interest deductions.

"This is particularly painful to developers and the real estate industry because they are a more highly leveraged industry," Bakko said. Auto dealers and boat dealers also would be negatively affected by this change.

Also up for discussion is whether Minnesota should conform to the federal law and limit the ability to write off net operating losses.

Charlie Weaver, executive director of the Minnesota Business Partnership, which represents the state's largest companies, said executives are mobilized and urging lawmakers to do no harm.

Cynthia Bauerly, commissioner of the Minnesota Department of Revenue, said Dayton's goals continue to be fiscal stability and tax fairness for families. She said Minnesota remains competitive for businesses: "When you look at our qualified workforce, education and quality of life, we are very competitive. We are home to a number of great businesses, and they've decided to make Minnesota their home."

While they disagree on much, Bauerly and Weaver said the Legislature needs to do something.

"We're hearing from businesses they want something to get done for the sake of certainty," Bauerly said.

Weaver added: "Doing nothing is not a good alternative."