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On August 17, 2020, Governor Pete Ricketts signed LB 1107, which modifies Nebraska's business incentives program. LB 1203, which would have addressed Nebraska's treatment of transition tax income under IRC Section 965 and global intangible low-taxed income (GILTI) under IRC Section 951A, failed to pass before the Nebraska legislature adjourned on August 13, 2020.

LB 1107: ImagiNE Nebraska Act

The Nebraska Advantage Act, one of the state's existing incentives programs, expires at the end of 2020. New law enacted under LB 1107 will replace the Nebraska Advantage Act with the ImagiNE Nebraska Act (Act). The Act gives tax incentives to qualifying taxpayers that attain certain levels of employment and investment at qualified locations. A qualified location is defined as a location where most of the taxpayer's business is in one of the following areas:

• Manufacturing
• Testing laboratories
• Rail or truck transportation
• Insurance carriers
• Wired or wireless telecommunications carriers (except satellite)
• Telemarketing providers
• Data processing or computer facilities management services
• Warehousing and storage
• Administrative management of the taxpayer's activities
• Logistics facilities
• Services provided on aircraft
• Research, development or testing for scientific, agricultural, animal husbandry, food product, industrial or technology purposes
• Production of electricity using renewable energy
• Computer systems design
• Financial services
• Any other business location where at least 75% of revenue is from sales made and delivered to unrelated customers outside Nebraska

To receive incentives under the Act, a taxpayer must apply to the Nebraska Department of Economic Development (DED). The application must (1) request an agreement identifying the taxpayer's levels of employment and investment, (2) include specific information and acknowledgments, and (3) contain a $5,000 nonrefundable application fee. The Act is effective January 1, 2021, with no applications accepted after December 31, 2030. If approved, the DED and the taxpayer will enter into an agreement regarding qualified location(s).

An agreement is valid for up to 15 years. Employment and investment levels must be reached by the end of the ramp-up period, which is the four years after the year of application. Credits can be used in the order they were first allowed; when credits are the same age, credits from an older tax incentive program, such as the Nebraska Advantage Act, must be applied first. Credits can be used beginning with the tax year the minimum employment and investment levels were reached. The performance period is the year the employment and investment levels were met plus the following six years, and the carryover period is the three years after the performance period.

Under LB 1107, the levels of investment and employment that qualify for various incentives are:

• 20 new employees
• Investment of at least $250,000 but less than $1 million and five new employees within economic redevelopment areas
• Investment of at least $1 million and 10 new employees
• Investment of at least $5 million and 30 new employees
• Investment of at least $250 million and 250 new employees
• Investment of at least $50 million

Only wages paid to employees who are Nebraska residents are included in the computation to determine the number of equivalent employees.

Under the Act, a qualifying taxpayer is eligible for wage credits, investment tax credits, sales tax refunds, personal property tax exemptions and real property tax refunds.

LB 1203: Legislation to clarify Nebraska treatment of IRC Section 965 income, GILTI not enacted

As noted in Tax Alerts 2019-1639 and 2019-0062, the Nebraska Department of Revenue (Department) issued guidance (most recently in its GIL 24-19-1) on Nebraska's treatment of IRC Section 965(a) repatriation income and GILTI under IRC Section 951A. The guidance stated the Department's position that the IRC Section 965(a) inclusion is not a dividend or deemed dividend deductible under Neb. Rev. Stat. Section 77-2716(5). Since issuing its guidance, the Department has been disallowing any dividend received deduction (DRD) for IRC Section 965(a) income.

In January 2020, the Nebraska legislature introduced LB 1203, which would have amended Neb. Rev. Stat. Section 77-2716(5) to provide that "deemed dividends" would include both IRC Section 965(a) repatriation income and GILTI under IRC Section 951A, net of the deduction allowed in IRC Section 250(a)(1)(B). The legislation was intended to clarify the meaning of Neb. Rev. Stat. Section 77-2716(5) and would have applied to returns filed before, on or after the effective date of the legislation. LB 1203 had been designated priority legislation, normally an important step towards passage, just before the COVID-19 emergency-induced recess in March 2020. When the legislature reconvened in July, however, the legislation did not advance and was not passed.

Presumably, the Department will continue to pursue this issue with taxpayers. There have also been indications that the Department may challenge the exclusion from Nebraska tax for subpart F income generally in some circumstances. This most recent development is based on the Department's view that subpart F income may not be a deemed dividend in certain situations.

Implications

Taxpayers should consider whether they qualify for the new incentives programs adopted in the ImagiNE Nebraska Act, which will begin in 2021. Taxpayers should also monitor Department audit activity in the areas of IRC Section 965(a) repatriation income, GILTI under IRC Section 951A, net of the deduction under IRC Section 250, and more recently, subpart F income generally. While LB 1203 did not pass, taxpayers should consider arguments that may be marshalled in objecting to assessments.

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