Minnesota gross income does not include personal or
professional service income earned in Minnesota by a resident of Wisconsin,
North Dakota, or Michigan. A resident of North Dakota or Michigan can use this
provision only if the resident customarily returns at least once a month to
their residence in that state. Wisconsin, North Dakota, and Michigan are the
only three states that have reciprocity exclusion agreements with the state of
Minnesota. The income subject to reciprocity exclusion is compensation for the
performance of personal or professional services which the taxpayer personally
renders. It is not enough to employ others to render these services.
A. The reciprocity exclusion does not apply
where the personal or professional service income is earned as part of a
business operated by the taxpayer which has employees that do more than
incidental duties for the business or where there is the sale or delivery of
goods which are more than an incidental part of the business. The reciprocity
exclusion does apply to all the personal or professional income earned in the
business where the sale of goods and the services of the employees are
incidental. Where a partner is a member of a partnership where the selling of
goods or the services of employees is more than incidental to the partnership
business, reciprocity exclusion would apply only to the partner's salary
(personal or professional service income) but not to the distributive shares of
the partnership business. Salaries would be subject to a reasonableness test
and a provision for salaries must be part of the partnership agreement. If
there is no written partnership agreement, or if in the written agreement no
salary or salary formula is specifically provided, the payment to the partners
is a partnership distribution and is not subject to reciprocity exclusion.
Partnership draw does not constitute a salary; it is a convenience to the
partners in withdrawing a share of their business equity. If all partners are
performing personal services and the sale of goods and the services of the
employees are incidental, the reciprocity exclusion applies to the partner's
salary and to the partner's distributive share. The imputed income of a
shareholder of an electing small business corporation (Subchapter S) is not
subject to reciprocity exclusion as this income is in the form of a partnership
distribution.
B. The word
"incidental" means the sale of goods or the services of employees which are
only a minor or secondary contribution to the personal service income of the
individual or partnership for whom performed. The sale of goods or the services
of employees is incidental if for the sale of goods the gross profit (gross
receipts less cost of goods sold) or for the services of employees the total
compensation paid the employees is less than $20,000 or ten percent of the
gross profit of the business, whichever is greater. The total compensation paid
the employees and the gross profit from the sale of goods must be totaled when
determining if the goods and employees are incidental.
C. If an individual's total income assignable
to Minnesota is subject to reciprocity exclusion, that individual need not file
a Minnesota income tax return. However, if that individual has Minnesota
income, some of which is subject to reciprocity exclusion and some of which is
not subject to reciprocity exclusion and if the income which is not subject to
reciprocity exclusion exceeds the filing requirements for filing a Minnesota
income tax return, that individual must file a Minnesota income tax return.
That individual should use the appropriate federal adjusted gross income for
the taxable year. A subtraction would be allowed at a subsequent point on the
return to remove income which is subject to reciprocity exclusion.
In order to claim the reciprocity exclusion, individuals should
file form M-115, which is an affidavit claim for exemption of compensation
received for services performed under the reciprocity exclusion. Although the
exact form may change, the following information will be required:
(1) name, address, and social security number
of the individual;
(2) year for
which the affidavit is being submitted;
(3) amount of income received for services
performed in Minnesota subject to reciprocity exclusion;
(4) a statement whether or not Minnesota
income tax was withheld on that income;
(5) the name and address of the
employer;
(6) type of services
performed in Minnesota;
(7) state
in which the individual maintains residence;
(8) the year in which the individual became a
resident of the state;
(9) a
statement disclosing whether or not the individual customarily returns to the
individual's residence in the other state at least once a month;
(10) a statement whether or not the
individual filed an income tax return with that state and whether the income
subject to reciprocity exclusion was declared on that return; and
(11) a statement declaring if the individual
ever was a resident of Minnesota and, if so, when was the date of last
residence.
An individual whose income is subject to reciprocity exclusion
may also want to complete a withholding exemption certificate, form
MW-6.
