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On July 29, 2024, Nebraska's legislature introduced LB 40, which would require worldwide combined reporting for corporate income tax for tax years beginning on or after January 1, 2026.

Background

On July 25, 2024, the Nebraska legislature convened in a special session focusing on tax reform. Nebraska Governor Jim Pillen has been championing a vision for cutting property taxes by 40%. The legislature is considering a myriad of bills to pay for the property tax reductions. LB 40 was one of the bills introduced to help pay for the property tax reductions.

LB 40

LB 40 would require any person, including any corporation, wherever incorporated or domiciled, that is a member of a unitary business to file a combined return. The combined return would include the income and apportionment factors for all members of the combined group wherever located or doing business. The combined return would be filed under the parent corporation's name and federal employer identification number, if the parent is a member of the combined group. If not a member, the members of the combined group would designate a filing member.

LB 40 would define a unitary business as a single economic enterprise, including a commonly controlled¹ group of business entities that are sufficiently interdependent, integrated and interrelated so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among the parts or entities and a significant flow of value to the entities. A unitary business also would include any part of a business conducted by a person through its interest in a partnership, whether the interest is held directly or indirectly through a series of partnerships or other pass-through entities.

To compute the combined income, LB 40 would require each group member to determine its separate income first. For a member incorporated in the United States or included in a federal corporate income tax return, the member's income would be the taxable income for the member under the Internal Revenue Code (IRC), subject to existing Nebraska adjustments. For non-US members, the income or loss would be determined from a profit and loss statement prepared for that member on a separate-entity basis in the currency in which its books are regularly maintained. If the profit and loss statement is subject to an independent audit, it would be adjusted to conform it to US generally accepted accounting principles and modified to reflect federal and Nebraska tax law. Items denominated in a foreign currency would be translated into US dollars on a reasonable, consistent basis applied year-to-year and entity-to-entity.

The members' separate income or loss would then be combined, eliminating intermember transactions by applying the IRC's consolidated filing rules as if the combined group were filing a consolidated federal return. LB 40 would exclude intermember dividends from income to the extent they were to be paid out of the earnings and profits of the unitary business included in the combined return in the current year or an earlier year.

LB 40 would eliminate nonapportionable income from combined income, with the remaining apportionable income apportioned by the combined group's apportionment factor. The apportionment factor would generally be determined using existing sourcing rules, but a combined group's apportionment factor numerator would include amounts sourced to Nebraska regardless of the separate entity to which those amounts may be attributed; the denominator would include amounts associated with the combined group's unitary business wherever located. The combined group would then add the nonapportionable income allocable to Nebraska back to post-apportioned income.

LB 40 appears to allow a combined group to use a member's unused net operating loss carryovers that preceded membership in the combined group if:

• The member was part of a separate combined group when the losses were generated
• The member was a Nebraska taxpayer when the losses were generated
• The net loss carryover is not limited under any provisions of the IRC, including applicable rules and regulations, applied as if the combined group were a consolidated group

Implications

For the last four decades, Nebraska's corporate income tax has been based on a water's-edge combined group. With this proposal, Nebraska becomes the latest state to consider worldwide combined reporting in recent years. Minnesota had considered a similar proposal in 2023 but abandoned it in favor of other tax changes. See Tax Alert 2023-0961.

The legislature also is considering bills that would:

• Amend and decrease property taxes in the state while substantially expanding the sales tax base to a range of additional services (e.g., manufacturing equipment, repair services, accounting and attorney services, and other business-to-business services) and impose a new advertising services tax (LB 1)
• Eliminate the franchise tax on financial institutions and subject them to the corporate income tax (LB 47)
• Impose a real estate transfer tax on mansions (LB 36)
• Impose an excise tax on delivery sales (LB 19)
• Increase the corporate income rate to 5.84% for the 2027 tax year before phasing in a flat rate in future years (LB 10)

A list of proposed bills is available here.

EY will continue monitoring developments in these areas.