Qualified Small Business and Farm Property Deduction

Qualified small business properties must meet all of the following requirements:

• The value of the property after deductions—including debts, expenses, and bequests to a surviving spouse—was included in the decedent's federal adjusted taxable estate.
• The property consists of trade or business property (or shares of stock or other ownership interests that are not publicly traded).
• The decedent or decedent's spouse "materially participated" in the operations of the trade or business during the taxable year that ended before the decedent's death. In general, to materially participate means being involved in the operations of the trade or business on a regular, continuous and substantial basis. The decedent or decedent's spouse must meet certain material participation criteria set by the Internal Revenue Service (IRS). (See Internal Revenue Code, section 469(h).)
• The trade or business had gross annual sales of $10 million or less during the last taxable year that ended before the decedent's death.
• Cash, cash equivalents, publicly traded securities, or assets not used in the operation of the trade or business cannot be claimed as part of the deduction.
• The decedent or the decedent's spouse continuously owned the property for a three-year period ending at the decedent's death.
• A family member "materially participated" in the operations of the trade or business for three years set by the IRS. (See Internal Revenue Code, section 469(h).)
• The estate and qualified heir agree to pay the recapture tax, if applicable.

Qualified farm properties must meet all of the following requirements:

• The decedent or the decedent's spouse continuously owned the property for a three-year period ending at the decedent's death.
• The value of the property after deductions—including debts, expenses, and bequests to surviving spouse—was included in the decedent's federal adjusted taxable estate.
• The property consists of agricultural land and is a family farm. (See Minnesota Statute 500.24)
• The property was classified as agricultural homestead, agricultural relative homestead, or special agricultural homestead for property tax purposes in the taxable year of death. (See M.S. 273.124)
• The property was classified as class 2a or agricultural land for property tax purposes in the taxable year of death. (See M.S. 273.13, subdivision 23)
• A family member maintains the class 2a classification for three years following the decedent's death.
• The estate and qualified heir agree to pay the recapture tax, if applicable.

A qualified heir must be a family member who acquired the qualified property upon death of the decedent. To qualify as a family member, an individual must be one of the following:

• The decedent's ancestors (e.g., parent, grandparent, etc.)
• The decedent's spouse
• A lineal descendant (e.g., child, grandchild, etc.) of the decedent, of the decedent's spouse, or of the decedent's parents
• The spouse of any lineal descendant
• A trust whose present beneficiaries are all family members

A recapture tax is 16% of the total value (as allowed for federal estate tax purposes) of qualified property ceasing to satisfy the three-year holding period requirements. Qualified heirs must pay a recapture tax if they or a family member do not meet the ownership, participation, or maintenance requirements of the deduction(s) for the three years after the decedent’s death.

The tax is applied if any of the following occurs within three years of the decedent’s death and before the death of the qualified heir:

• The qualified heir disposes of any interest in the qualified property except by disposition to a family member.
• For the qualified small business property deduction, a family member is not involved in the operations of the trade or business on a standard, continual, and significant basis.
• For the qualified farm property deduction, a family member does not maintain the 2a classification for the qualified property.

The recapture tax return must be filed electronically through e-Services, and the tax must be paid to the Minnesota Department of Revenue within six months after the date of disqualifying disposition or cessation of use.