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Nebraska Governor Jim Pillen approved Legislative Bill 1023 (LB 1023) on April 23, 2024, which allows for the immediate expensing of certain business assets and research and development expenses, provides limited tax and withholding relief for nonresident employees, and implements an incentive program for employee relocations to Nebraska.

Deduction for depreciable assets and research and experimental expenditures

For tax years beginning on or after January 1, 2025, LB 1023 provides a corporate and individual income tax deduction for:

• Depreciable business assets that are qualified property or qualified improvement property under IRC Section 168
• Research and experimental (R&E) expenditures, as defined in Treas. Reg. 1.174-2, that the taxpayer elects to treat as expenses

The deduction is limited to (1) 60% of the full cost depreciable property placed into service after December 31, 2024, and (2) the R&E expenditures incurred during the tax year. The 60% deduction is allowed only to the extent the expenditures are not deducted for federal income tax purposes. Taxpayer may make an irrevocable election to amortize the expenditures over five years in lieu of taking an immediate deduction.

Partners, S corporation shareholders, limited liability company members, and estate or trust beneficiaries may claim the deduction to the extent of their shares of income or loss in the pass-through entity, estate, or trust.

Taxation of nonresident employees

LB 1023 provides some relief from nonresident income tax, along with corresponding employer withholding obligations, for nonresident employees working for a Nebraska employer. Effective for tax years beginning on or after January 1, 2025, LB 1023 amends the state's convenience-of-the-employer rule under 316 Neb. Admin. Code Section 22-003.01C to impose Nebraska income tax and withholding on a nonresident's wages from a Nebraska employer if all of the following apply:

• The nonresident's services are provided outside of the state for the employee's own convenience.
• The nonresident's services could be performed within the state.
• The employee is present in the state for more than seven days during the tax year in which the compensation was earned.

The law provides a de minimis safe harbors for attending conferences, meetings and trainings in Nebraska for seven days or fewer in a tax year (with a $5,000 wage cap) and for compensation paid to nonresidents for serving on a board of directors.

LB 1023 provides penalty relief for employers that fail to withhold Nebraska income tax if they maintain and rely on a time-and-attendance system for allocating wages among all taxing jurisdictions in which employees perform services. Employers that do not maintain a time-and-attendance system may still receive penalty relief if they rely on other documentation such as travel records, expense reimbursement records, or employee representations.

For more on these changes, see Tax Alert 2024-0967.

Employee relocation incentives

For tax years beginning on or after January 1, 2025, LB 1023 allows employers a refundable income tax¹ credit for new employees who move to Nebraska and earn at least $70,000 but not more than $250,000² annually. The refundable credit is limited to 50% of the relocation expenses paid by the employer, up to $5,000 per qualifying employee. Employers must apply for the credit through the Nebraska Department of Revenue (Department), which will approve qualifying applications on a first-come, first-serve basis until the budget limit of $5 million is reached. Employers must attach the credit certification to the appropriate income tax return. The credit is subject to recapture if the employee moves out of Nebraska within two years after claiming the credit.

LB 1023 also provides relocation incentives to employees who move to Nebraska and earn at least $70,000 but not more than $250,000 annually. Qualifying employees may make a one-time election to exclude all Nebraska-sourced wage income included in federal adjusted gross income. Employees must make the election within two calendar years of becoming a Nebraska resident and must not have been a Nebraska resident in the year before claiming residency for purposes of the exclusion. Recapture provisions apply for employees who fail to maintain Nebraska residency for two full calendar year following the year in which the exclusion is taken.

For more on the credit, see Tax Alert 2024-0967.

Implications

Taxpayers should take note that the immediate expensing provisions assume federal non-deductibility of the expense and are only allowed to the extent the expenses are not deducted on a taxpayer's federal return.

Employers will need to consider these new withholding requirements and the limited safe harbors that were adopted in LB 1023. Nebraska employers incurring employee relocation expenses for tax years beginning on or after January 1, 2025, should consider these new relocation incentives and apply for the credit as soon as possible as there is a funding limit ($5 million annually) for this program.