May 25, 2021
Nebraska legislature passes corporate income tax rate reductions but does not address deductibility of subpart F income
On May 21, 2021, the Nebraska Legislature passed LB 432, which would reduce Nebraska's top corporate income tax rate. Before being approved, LB 432 was amended to remove provisions that would have addressed the Nebraska Department of Revenue's (Department) treatment of IRC Section 965 repatriation income.
Corporate rate reduction
Nebraska's current regime has two corporate income tax rates: 5.58% on state taxable income up to $100,000 and 7.81% on state taxable income over $100,000. LB 432 retains the 5.58% on state taxable income up to $100,000, but reduces the top rate as follows:
As stated in LB 432, the legislature intends to further reduce the top corporate income tax rate to 7% and 6.84% for tax years beginning on or after January 1, 2024 and January 1, 2025, respectively. The rate reductions are intended to bring Nebraska in line with neighboring states and help reduce the state's reliance on tax incentive programs to encourage businesses to locate and expand in Nebraska.
Subpart F income
LB 432 does not address the Department's treatment of subpart F income, including IRC Section 965 repatriation income. The Department has issued General Information Letters (GILs), most recently GIL 24-19-1, providing that IRC Section 965 repatriation income was not a "deemed dividend" under Neb. Rev. Stat. 77-2716(5) (see Tax Alert 2019-1639) and thus not deductible. Earlier this year, the Department issued Revenue Ruling 24-21-1, stating that, based on its review of subpart F, only certain categories of subpart F income would be eligible for the Nebraska dividends received deduction (Tax Alert 2021-0404).
As originally introduced, LB 432 would have clarified that Neb. Rev. Stat. 77-2716(5) permitted taxpayers to deduct IRC Section 965 income and global intangible low-taxed income (GILTI). In the face of Department estimates of significant revenue reductions and legislative opposition, these provisions were withdrawn and Neb. Rev. Stat. 77-2716(5) remains unchanged.
Governor Pete Ricketts is expected to sign LB 432 in the near future.
Taxpayers have appealed assessments based on the Department's position on IRC Section 965 income. More recently, based on Revenue Ruling 24-21-1, the Department has assessed taxpayers on categories of subpart F income no longer deemed to be subject to the deduction in Neb. Rev. Stat. 77-2716(5) (see Tax Alert 2021-0404).
The Council on State Taxation is currently challenging the Department's position on IRC Section 965 income before a Nebraska district court. Taxpayers with cases on appeal or facing assessments based on the Department's guidance will want to consider the impact of these developments.