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Composite Income Tax
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Beneficiaries of a fiduciary, partners of a partnership, and shareholders of an S corporation may qualify to elect Composite Income Tax when filing.
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When a fiduciary (estate or trust) has Minnesota-source income, beneficiaries generally must file a state tax return to report and pay tax on their share. See Individual Income Tax Instructions for details.
However, qualifying beneficiaries who don’t live in Minnesota – “nonresident beneficiaries” – may instead elect to have the fiduciary report and pay composite income tax on their behalf. See “Reporting and Paying Composite Tax,” below.
To be included in the composite income tax, nonresident beneficiaries must not have any other Minnesota income beyond what they receive from the fiduciary or from other entities that can pay composite tax.
When a partnership has Minnesota-source income, individual partners generally must file a state tax return to report and pay tax on their share. See Individual Income Tax Instructions for details.
However, qualifying individual partners who don’t live in Minnesota – “nonresident partners” – may instead elect to have the partnership report and pay composite income tax on their behalf. See “Reporting and Paying Composite Tax,” below.
To be included in the composite income tax, nonresident partners must not have any other Minnesota income beyond what they receive from the partnership or from other entities that can pay composite tax.
Note: The partnership is not required to withhold Minnesota income tax for nonresident partners who are included in the composite income tax. See Nonresident Withholding for Partnerships for more information.
When an S corporation has Minnesota-source income, shareholders generally must file a state tax return to report and pay tax on their share. See Individual Income Tax Instructions for details.
However, qualifying shareholders who don’t live in Minnesota – “nonresident shareholders” – may instead elect to have the S corporation report and pay composite income tax on their behalf. See “Reporting and Paying Composite Tax,” below.
To be included in the composite income tax, nonresident shareholders must not have any other Minnesota income beyond what they receive from the partnership or from other entities that can pay composite tax.
When determining composite income tax, only the current year's income is included. The S corporation is not allowed to reduce taxable income with the prior year's net operating loss.
Note: The S corporation is not required to withhold Minnesota income tax for nonresident shareholders who are included in the composite income tax. See Nonresident Withholding for S Corporations for more information.
When completing the return of a fiduciary, partnership, or S corporation, mark the "Composite income tax" box on the return if any beneficiary, partner, or shareholder included in the return is electing composite tax. Follow the instructions and complete the applicable Minnesota K schedule for each nonresident individual (or certain trusts) electing composite tax to determine the amount due.
For taxable years beginning after December 31,2023, individuals, estates, and trusts must pay a Minnesota Net Investment Income Tax (NIIT) of 1% on net investment income exceeding $1 million.
The Minnesota NIIT must be reported and paid on either:
Minnesota NIIT cannot be reported and paid as part of a composite income tax election. The composite income tax can still satisfy the partner's or shareholder's tax for the distributive share of the entity's business income.
For Form M1 Filers only
Partners or shareholders electing composite income tax to satisfy their filing requirement must file Schedule NIIT, Net Investment Income Tax, with form M1 if their net investment income exceeds $1 million. In these situations, Form M1 will only report the NIIT.
For more information, visit the Net Investment Income Tax page.
