On May 17, the Minnesota Legislature passed H.F. 2438, the 2026 omnibus tax bill, and sent it to the governor following a late-session agreement. The bill includes a broad range of tax changes, including federal conformity updates, changes to Minnesota’s pass-through entity tax and opportunity zone treatment, selected business tax provisions, and tax administration changes.

Federal Conformity

The bill updates Minnesota’s conformity to many federal income tax changes enacted in Public Law 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA). As we previously discussed in our client alert on OBBBA, the federal legislation made significant changes across a wide range of tax provisions. Minnesota conforms to many of those changes, but does not adopt every federal change for state tax purposes.

For corporations, one significant nonconformity item involves research and experimental (R&E) expenditures. The bill generally differs from OBBBA’s immediate federal expensing treatment and requires Minnesota taxpayers to add back 80% of the federal deduction for domestic R&E expenditures. That amount is then recovered by reducing Minnesota taxable income in equal amounts over the next four taxable years.

The bill also modifies Minnesota’s treatment of controlled foreign corporation (CFC) income, including net CFC tested income and subpart F income. In particular, Minnesota does not adopt OBBBA’s permanent extension of the federal look-through rule. The federal CFC look-through rule generally allows related CFCs to make certain payments to each other, such as dividends, interest, rents, and royalties, without those payments being treated as passive subpart F income, as long as the payments come from active foreign business income. These changes may be relevant for businesses with foreign subsidiaries or ownership structures involving CFCs.

H.F. 2438 also preserves Minnesota’s 50% limitation on business meal deductions despite OBBBA’s 100% deduction for certain meals. Businesses may be affected if they claim the full federal deduction for qualifying meals, including meals provided on fishing boats or food and beverages sold in certain business transactions, because the excess deduction must be added back on their Minnesota returns.

The bill also adjusts Minnesota’s individual alternative minimum tax rules to account for Minnesota’s selective conformity to OBBBA. Business owners may be affected if pass-through income, opportunity zone gains, or foreign subsidiary income is reported on their individual Minnesota returns.

Pass-Through Entity Tax

The bill extends Minnesota’s pass-through entity tax, commonly referred to as the PTET, through tax year 2027. It also revives and reenacts PTET retroactively from January 1, 2026.

PTET remains an important planning tool for partnerships, limited liability companies taxed as partnerships or S corporations, and S corporations because it preserves Minnesota’s entity-level workaround to the federal state and local tax deduction limitation, at least temporarily.

The bill also extends the related credit for pass-through entity taxes paid to another state, makes technical changes to the PTET net income calculation, and allows the commissioner to disallow an owner’s PTET credit if the entity-level tax has not been paid.

Because PTET is being revived retroactively, the bill provides estimated payment relief for tax year 2026.  No additional tax will be imposed if the first PTET estimated payment is made in full with the second estimated payment.

Opportunity Zones

The bill decouples Minnesota from federal opportunity zone gain deferral and basis benefits beginning in tax year 2027. For individuals, the bill requires an increase to Minnesota taxable income for opportunity zone capital gain income, including certain gains deferred for federal tax purposes and certain basis increases allowed under federal law. The bill creates parallel rules for corporations. It also provides rules allowing a later reduction to Minnesota taxable income for previously taxed opportunity zone gains. Those provisions are intended to prevent the same gain from being taxed twice by Minnesota—first when the gain is taxed under Minnesota’s nonconformity rules, and later when the gain is recognized for federal tax purposes.

Opportunity Zone treatment also affects Minnesota’s net investment income tax. Under the bill, a Minnesota-specific adjustment would increase net investment income for certain opportunity zone gains, while a later adjustment would reduce net investment income for opportunity zone gains Minnesota has already taxed. As a result, investors may receive federal opportunity zone benefits without receiving corresponding Minnesota benefits. Businesses, funds, and investors with existing or planned opportunity zone investments should evaluate the Minnesota tax impact separately from the federal analysis.

The federal opportunity zone program, enacted by TCJA, generally allowed taxpayers with eligible capital gains to reinvest those gains in a Qualified Opportunity Fund (QOF) and defer federal recognition of gain. For many taxpayers, that deferral lasts until the earlier of an inclusion event, such as a sale of the QOF interest, or December 31, 2026.

Minnesota did not immediately conform to the TCJA. Instead, Minnesota enacted conformity legislation in May 2019 after many 2018 returns had already been filed. To address that timing issue, Minnesota created a “special limited adjustment” under Minnesota Statutes section 290.993. In general, that rule was intended to prevent certain retroactive TCJA conformity changes from creating additional Minnesota tax or refunds for tax year 2018 unless the provision was specifically excepted.

For some 2018 opportunity zone investors, however, the rule created a timing mismatch. Although federal law allowed the gain to be deferred, Minnesota effectively treated the gain as taxable in 2018, causing a potential double taxation issue in 2026 when the federal deferral ends.

Following the enactment of H.F. 2438, for tax years beginning after December 31, 2026, Minnesota will no longer follow the federal opportunity zone provisions—neither the deferral nor the permanent exclusion for long-held investment will reduce Minnesota taxable income. The bill does prevent double taxation of gain already reported to Minnesota, but the exclusion benefit of QOF interests held ten or more years will not be available at the state level. These rules apply across individuals, corporations, pass-through entities, and composite filers. Unlike the 2018 situation, which was a byproduct of delayed conformity, this is deliberate legislative choice to depart from federal tax treatment going forward.

Other Business Provisions

For nonresident owners of pass-through entities, the bill clarifies composite return treatment for installment sale gain that is accelerated for Minnesota purposes, as well as later-year treatment for gain Minnesota has already taxed. This may be relevant in sales of partnership interests, S corporation interests, or asset of partnerships or S corporations that operated in Minnesota during the year of sale.

The bill repeals the market value exclusion for certain improvements to business property. Under prior law, qualifying improvements could be excluded from a property’s market value when calculating levy limits, debt limits, and certain state aid amounts. Going forward, those improvements will be included in the property’s assessed market value for those purposes.

H.F. 2438 also includes targeted tax increment financing changes, public finance changes, and changes to how sales tax revenue from motor vehicle repair and replacement parts is allocated, among other provisions.

Tax Administration

The bill revises the general timing rules for Minnesota tax refund claims. Under the revised rule, refund claims generally must be filed by the later of the 3 ½ year return based period or the two-year period measured from the date the tax, penalties, or interest were paid. Businesses should continue to track Minnesota refund deadlines carefully and should not assume prior timing rules apply.

What Should Businesses Do Now?

Businesses should review the H.F. 2438 in light of their entity structure, Minnesota filing profile, and current or planned transactions. Pass-through entities should revisit PTET elections and estimated payment timing. Corporations with R&E expenditures should model Minnesota treatment separately from federal treatment. Businesses and investors with opportunity zone or international tax exposure should confirm that Minnesota treatment has been separately analyzed. Because H. F. 2438 contains different elective dates for different provisions, taxpayers should avoid assuming that all changes apply at the same time.

Winthrop & Weinstine’s tax attorneys advise businesses, business owners, investors, and closely held companies on Minnesota tax planning, federal conformity issues, pass-through entity structuring, business transactions, and state and local tax matters. If you have questions about this alert or how the 2026 Minnesota omnibus tax bill may affect your business, please contact the Winthrop & Weinstine tax team.

May 26, 2026