On August 25, 2014, the Minnesota Department of Revenue released Revenue Notice 14-02, which provides an alternative method of apportioning compensation earned by certain corporate directors who are not residents of Minnesota for Minnesota income tax purposes. A copy of the notice is available here. The notice is not applicable to director compensation earned by residents of Minnesota, who are taxed in Minnesota on all of their income regardless of where it is earned.

Summary of Notice

Compensation received by an individual for service on a corporation’s board of directors is generally considered to be income from a trade or business carried on by the individual director. Under Minnesota Statutes Section 290.191, income from a trade or business that is carried on both inside and outside Minnesota must be apportioned among the states in which the business is carried on. Generally, income from the sale of services, including compensation for board service, is apportioned to the state in which the services are “received.” Minnesota Statutes Section 290.191, subdivision 5(j). As discussed below, the application of this standard to income received as compensation for board service is far from clear.

In Revenue Notice 14-02, the Department announced that it would permit an alternative method of apportioning compensation of nonresident directors who are paid for service on one or two corporate boards during a tax year. Service on multiple boards within a unitary business (such as a parent and subsidiary corporation) will be treated for this purpose as service on a single board.

Pursuant to the Notice, a director who does not exceed the two-board limit may apportion compensation for service on each board based solely on the time spent working for that board. Under this method, the percentage of income taxable in Minnesota is the same as the percentage of the director’s time working for that board that was spent in Minnesota. If a director serves on two boards, a separate computation is made for each board.

Nonresident directors who exceed the two-board limit must continue to apportion their compensation for board service based on Minnesota Statutes Section 290.191, subdivision 5(j). Under this statute, income is apportioned to the state in which the services are “received” as long as the corporation has a fixed place of doing business in that state. If the state where the services are received is not readily determinable, or the corporation does not have a fixed place of doing business in that state, the services are apportioned to the location from which the services were ordered or, if that location cannot be determined, from the location to which the services are billed. Alternatively, directors may apply for an alternative method of apportionment under Minnesota Statutes Section 290.20.

Remaining Questions

Revenue Notice 14-02 provides a relatively clear method of apportionment for nonresident directors who receive compensation for service on one or two corporate boards in a given tax year. However, many questions remain unanswered by this notice, including:

  • For directors who do not exceed the two-board limit, it is not clear exactly what services the director should include when determining his or her “time spent… working for” that board.
  • For directors who exceed the two-board limit, there continues to be little official guidance regarding how to apportion compensation. Although the Notice confirms that Minnesota Statutes Section 290.191, subdivision 5(j) applies, it does not provide any guidance regarding where the services of a director are “received.”
  • For all nonresident directors, it is not clear how deferred compensation will be treated and, in particular, whether such income is apportioned based on the year in which it is earned or the year in which it is received.
  • For all nonresident directors, it is not clear how equity awards (stock options, RSUs, etc.) will be apportioned (for example, if an equity award is vested on issue and the equity award is issued at a meeting outside of Minnesota, it may be that none of the equity award is apportioned to Minnesota).