What happens next: The owner files a Minnesota individual tax return ( Form M1, Individual Income Tax ) and claims credit for the withheld tax on Schedule M1W, Minnesota Income Tax Withheld, line 3. Option 3: Pass-Through Entity (PTE) Tax Election Your partnership or S corporation can elect to pay Minnesota income tax at the business level for all owners (residents and nonresidents). How it works : • File Schedule PTE with your business return by the due date or extended due date. • The business pays tax at 9.85 percent of Minnesota source income. • Owners receive a refundable credit for their share of the tax paid. • For nonresident owners only: The PTE election can satisfy their Minnesota filing requirement if they have no other Minnesota income. • Minnesota resident owners must still file a Minnesota individual tax return ( Form M1 , Individual Income Tax). Important details: • The election must be made by owners holding more than 50 percent of the business . • Once made, the election applies to all owners and cannot be revoked after the original due date of the return. • Note: The PTE tax was set to expire after December 31, 2025, but legislation to extend it through 2027 was under consideration. Complexity and Professional Advice Partnership tax rules—especially regarding special allocations, basis calculations, and debt allocations—can be very complex. It's highly recommended to work with a tax professional or accountant when: • Setting up special allocations in your partnership agreement • Tracking basis (especially when debt is involved) • Claiming partnership losses • Dealing with distributions or sales of partnership interests Key Takeaway: Partnerships offer tax flexibility and avoid double taxation, but they require careful planning and tracking. Partners pay tax on their share of income whether distributed or not, and special allocations must have real economic substance to be respected by the IRS.
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