02 June 2023 Nebraska adopts elective pass-through entity tax and phases-in income tax rate reductions
On May 31, 2023, Nebraska Governor Jim Pillen signed LB 754, which enacts an elective PTET, including provisions for retroactive elections and phased-in reductions to individual and corporate income tax rates. The legislation took effect upon the Governor's signature. These provisions are discussed below. LB 754 allows a partnership or a small business corporation1 to make an annual, irrevocable election to pay taxes at the entity level. LB 754 defines partnership to include any entity treated as a partnership for federal income tax purposes but excludes publicly traded partnerships. The election can be made retroactively to tax years beginning on or after January 1, 2018, with different election procedures for retroactive and current year elections. Partnerships may make retroactive elections for tax years beginning on or after January 1, 2018, but before January 1, 2023. Those elections must be made before December 31, 2025. The Nebraska Department of Revenue (Department) will prescribe the form and manner for the retroactive election, which may not include any changes to past returns other than those directly related to the election. If a partnership files a retroactive election, the deadline for filing a claim for credit or refund is extended for affected partners to the later of the existing statute of limitations2 or January 31, 2026. The Department will determine the form partners must use for refund requests. The Department will not pay interest on the refunds. The Department will have one year from the date the partnership files its return to review and make a proposed deficiency determination. For tax years beginning on or after January 1, 2023, partnerships must make the election on or before the due date, including extensions, for filing the applicable income tax return. The election must be made on a form and in the manner prescribed by the Department. The highest individual income tax rate in effect for the tax period will apply to the electing partnership's net income apportioned or allocated to Nebraska. If the tax results in a net operating loss (NOL), LB 754 will not allow the electing partnership to carry forward the NOL to succeeding tax years. Partners may claim a refundable credit based on their distributive share of tax paid by the partnership. An electing partnership will be subject to Nebraska's corporate income tax estimated payment requirements, but those requirements will not apply for tax years beginning before January 1, 2024. If a partner in an electing partnership is itself a partnership, its partners may claim the refundable credit or the credit may be applied against the partner's tax, interest and penalties. Any excess credit will be treated as an overpayment and may be refunded or applied to the following tax year. If the upper-tier partnership elects to be taxed at the entity level, that partnership may claim a credit for entity tax paid by the lower-tier pass-through entity. The upper-tier electing partnership must distribute the pro-rata share of credits to its partners by all tiers of electing partnerships. Partners in an electing partnership will be required to file a Nebraska income tax return to report their distributive share of income from the partnership and must add back Nebraska tax deducted by the partnership for federal income tax purposes. Nonresident individual partners in an electing partnership will not be required to file an individual income tax return if the only Nebraska-source income is from the electing partnership. If the partner's income is from one or more electing partnerships, the individual's income tax liability would be satisfied by the refundable credit discussed previously. LB 754 amends Nebraska's resident credit to allow a resident individual, trust or estate a credit for elective entity-level taxes paid to other states or the District of Columbia, if the other jurisdiction's PTET is similar to Nebraska's PTET. LB 754 allows a partnership to elect to file an amended Nebraska income tax return and pay all Nebraska income tax, penalties and interest associated with the amended return at the top individual tax rate as if the partnership were an individual. Partners are not required to file amended Nebraska income tax returns. The partners' basis and other tax attributes, arising from their interest in the partnership, will be determined as if the election had not been made and in a similar manner as set forth for federal income tax purposes. LB 754 phases in a reduction of Nebraska's individual income tax rates and bracket structure, going from four brackets to three, over four years, starting in 2024. The rate and bracket reductions will proceed as follows:
LB 754 also phases in similar changes to Nebraska's corporate income tax rate structure, moving from a two-bracket structure to a flat rate. For tax years beginning on or after January 1, 2024, the corporate income tax rate will be 5.58% on the first $100,000 of corporate income and 5.84% above $100,000. A reduced flat rate is then phased in as follows: LB 754 makes Nebraska the latest state to adopt an elective PTET intended to comply with the provisions of IRS Notice 2020-75. Nebraska, however, becomes only the second state, besides Colorado, to enact this tax retroactively going back to tax years beginning on or after January 1, 2018. The Department must develop the necessary forms to make these elections. EY will continue to monitor developments in this area.
1 Defined as an entity subject to tax under subchapter S of the Internal Revenue Code. Hereinafter, the use of the term "partnership" will also include an electing small business corporation. 2 The later of three years from the return filing date or two years from the date the tax was paid. NRS 77-2793(1) Document ID: 2023-0991 | |||||||||||||||||||||
