Achieving a Better Life Experience Act of 2014 $0 ($20) ($50) ($110) ($240)

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1 January 9, 2015 Department of Revenue Analysis of S.F. 50 (Skoe) / H.F. 6 (Davids) INDIVIDUAL INCOME TAX CORPORATE FRANCHISE TAX Federal Update Fund Impact F.Y F.Y F.Y F.Y F.Y (000 s) Tax Increase Prevention Act of 2014 ($19,015) $9,790 ($355) (,540) ($7,730) ($890) $12,730 ($1,025) ($7,935) ($10,920) Total ($19,905) $22,520 ($1,380) ($13,475) ($18,650) Achieving a Better Life Experience Act of 2014 $0 ($20) (0) ($110) ($240) IRA Rollovers for Payments from Airlines (Negl.) ($100) (Negl.) (Negl.) (Negl.) All Provisions ($19,015) $9,670 ($405) (,650) ($7,970) ($890) $12,730 ($1,025) ($7,935) ($10,920) General Fund Total ($19,905) $22,400 ($1,430) ($13,585) ($18,890) The Tax Increase Prevention Act is effective for tax year 2014 only. The Achieving a Better Life Experience Act is effective beginning tax year The IRA rollover provisions are effective the day following enactment. EXPLANATION OF THE BILL DOR Administrative Costs/Savings The bill would update reference to the Internal Revenue Code as amended through December 31, 2014, and thereby adopt provisions in the Tax Increase Prevention Act of 2014, the Achieving a Better Life Experience (ABLE) Act of 2014, and provisions relating to IRA rollovers for certain airline employees. The Tax Increase Prevention Act and ABLE Act were both contained in Public Law , enacted December 19, The IRA rollover provisions were contained in Public Law , enacted December 18, Tax Increase Prevention Act The Tax Increase Prevention Act of 2014 extended to tax year 2014 many federal tax provisions that expired at the end of tax year The bill would adopt the provisions for Minnesota tax purposes. The provisions that would be adopted and their estimated revenue impact are listed by category on the attached table. The estimates for increased Section 179 expensing and bonus depreciation assume an addback of 80% in the first year and five-year recovery, as under current law. Yes No X

2 Department of Revenue January 9, 2015 Analysis of S.F. 50 / H.F. 6 Page 2 EXPLANATION OF THE BILL (Cont.) ABLE Act The Achieving a Better Life Experience Act of 2014 allows states to establish an ABLE program under Section 529 of the Internal Revenue Code for individuals who are diagnosed as blind or disabled before the age of 26. Under a qualified ABLE program, a blind or disabled person may be designated as the beneficiary of an ABLE account. Contributions may be made to a beneficiary s ABLE account to be used to meet the beneficiary s qualified disability expenses. Contributions are not deductible for income tax purposes and are limited by the amount of the annual gift tax exemption ($14,000 in 2014). Earnings in the account accumulate on a tax-deferred basis. Distributions from an account are exempt from income tax to the extent that they are used for qualified disability expenses of the beneficiary. Each state may choose whether to enact an ABLE program. The bill updates reference to the Internal Revenue Code to include these provisions but does not contain language to create an ABLE program for Minnesota residents. IRA Rollovers for Payments from Airlines The FAA Modernization Act of 2012, Public Law , allowed a qualified airline employee who received a settlement payment from an airline company in bankruptcy to roll over that amount into a traditional IRA. The provision was limited to airlines that filed for bankruptcy after September 11, 2001, and before January 1, Minnesota conformed to this provision in 2012 and allowed amended returns to be filed until April 15, Public Law extended that provision to include airlines that filed for bankruptcy on November 29, 2011, effectively extending the same treatment to American Airlines employees. For airline employees covered under the 2012 law, the new federal law also extended the deadline to file amended returns until April 15, The bankruptcy settlement payments were generally taxable in the year they were received. However, any amount that is rolled into a traditional IRA is not taxable until it is withdrawn from the IRA. An employee who elects to roll over the payment into a traditional IRA may file an amended federal return to claim a refund for the tax paid on the rollover amount. Under the bill, a qualified airline employee could also file an amended Minnesota return to claim a refund. The amended return would have to be filed within the normal statute of limitations, three and a half years of the due date of the original return. For airline employees who previously rolled over an amount into an IRA under the provisions of the 2012 law but did not file an amended return before the deadline, the bill would extend the filing deadline to June 1, 2015.

3 Department of Revenue January 9, 2015 Analysis of S.F. 50 / H.F. 6 Page 3 REVENUE ANALYSIS DETAIL Tax Increase Prevention Act The House Income Tax Simulation Model (HITS 6.3) was used to estimate the home mortgage insurance premiums deduction. For other provisions, the estimates are based on the estimates for the federal legislation prepared by the staff of the Joint Committee on Taxation, dated December 3, Where applicable, the estimates were divided between the individual income tax and corporate franchise tax. The estimates for each provision were apportioned to Minnesota based on information relevant to that provision. The estimates were adjusted for the difference between federal and state tax rates and federal and state fiscal years. ABLE Act The estimate is based on the estimate for the federal legislation prepared by the staff of the Joint Committee on Taxation, dated December 3, The estimate was apportioned to Minnesota by 1.6%, which is Minnesota s percentage of the nation s blind and disabled individuals under the age of 34, from the U.S. Census Bureau s American Community Survey. The estimate was adjusted for the differences between federal and state tax rates and federal and state fiscal years. The fiscal impact will depend on whether Minnesota adopts an ABLE program and the timing of its implementation. IRA Rollovers for Payments from Airlines The estimate is based on an unpublished estimate of the federal legislation prepared by the staff of the Joint Committee on Taxation. The number of American Airlines employees in Minnesota in 2011 was determined from W-2 information. This information was used in apportioning the federal estimate to Minnesota. The estimate was adjusted for differences between federal and state income tax rates and federal and state fiscal years. Source: Minnesota Department of Revenue Tax Research Division nue-analyses.aspx sf0050(hf0006)_1 / cw, cc

4 Federal Update: The Tax Increase Prevention Act of 2014 All Provisions by Category ($000s) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Education-Related Provisions Deduction for Educator Expenses up to $250 ($1,200) $0 $0 $0 $0 Deduction for Qualified Tuition and Related Expenses ($2,100) $0 $0 $0 $0 Subtotal: Education-Related Provisions ($3,300) $0 $0 $0 $0 Homeownership Provisions Exclusion of Discharge of Indebtedness Income on Principal Residence ($9,500) $0 $0 $0 $0 Mortgage Insurance Premiums Deductible as Qualified Residence Interest ($4,600) $0 $0 $0 $0 Subtotal: Homeownership Provisions ($14,100) $0 $0 $0 $0 Charitable Contribution Provisions Special Rule for Contributions of Qualified Conservation Property ($300) (0) () () ($20) Tax-Free IRA Distributions, up to $100,000, to Certain Public Charities for Individuals Age 70 ½ and Older ($1,250) ($70) ($70) ($70) ($70) Enhanced Charitable Contribution Deduction for Food Inventory by Other than C Corporations ($600) $0 $0 $0 $0 Basis Adjustment to S Corporation Stock for Charitable Contributions ($220) ($20) ($10) (Negl.) (Negl.) Subtotal: Charitable Contribution Provisions ($2,370) ($140) ($85) ($75) ($90)

5 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Bonus Depreciation and Section 179 Expensing 50% Bonus Depreciation, with 80% Addback and 5-Year Recovery $800 $1,700,400 $11,400 ($300) ($700) ($3,200) ($6,700) ($4,400) ($9,300) Increased Section 179 Expensing, with 80% Addback and 5-Year Recovery $1,600 $600 $4,800 $1,800 $200 $100 ($2,100) ($800) ($3,100) ($1,200) Bonus Depreciation and Section 179 Expensing Subtotal $2,400 $2,300 $4,700 $10,200 $13,200 $23,400 ($100) ($600) ($700) (,300) ($7,500) ($12,800) ($7,500) ($10,500) ($18,000) Other Business and Investment Provisions Classification of Certain Racehorses as 3-Year Property ($80) (0) $20 $30 7-Year Recovery Period for Some Motorsports Race Track Complexes ($15) ($10) () () () 15-Year Straight-Line Depreciation for Qualified Leasehold, Restaurant, and Retail Improvements ($300) ($250) ($250) ($250) ($250) (25) ($475) ($475) ($475) ($475) Accelerated Depreciation for Business Property on an Indian Reservation ($225) (0) $35 $60 ($210) ($40) $30 0 Election to Expense Mine Safety Equipment ($15) Negl. Negl. Negl. Negl. Special Expensing Rules for Certain Film, Television, and Theatrical Productions ($300) ($275) $75 $70 $65 $60 $25 $20 $15 $10 Treatment of Certain Payments to Controlling Tax-Exempt Organizations for the Unrelated Business Income tax ($125) $0 $0 $0 $0

6 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Other Business and Investment Provisions (Cont.) Treatment of Certain Dividends of Regulated Investment Companies ($475) $0 $0 $0 $0 Exception Under Subpart F for Active Financing Income ($1,400) $0 $0 $0 $0 100% Exclusion of Gain on Certain Small Business Stock* $0 $0 $0 $0 $0 Reduction in Recognition Period for S Corporation Built-In Gains Tax ($425) ($20) ($15) ($10) () Special Depreciation Allowance for 2 nd Generation Biofuel Plant Property (Negl.) Negl. Negl. Negl. Negl. Energy-Efficient Commercial Building Deduction ($265) ($200) Other Business and Investment Provisions Subtotal ($1,645) ($3,190) ($4,835) ($270) ($470) ($740) ($170) ($425) (95) ($165) ($435) ($600) ($140) ($420) (60) *Revenue loss occurs after FY ($19,015) $9,790 ($355) (,540) ($7,730) ($890) $12,730 ($1,025) ($7,935) ($10,920) Tax Increase Prevention Act of 2014 Total ($19,905) $22,520 ($1,380) ($13,475) ($18,650)