ON MAY 31, 2023, GOVERNOR JIM PILLEN SIGNED LB754 into law. Among other changes, LB754 adds a retroactive to 2018 Nebraska pass-through entity tax, or PTET, law. By way of background, the Tax Cuts and Jobs Act of 2017 generally limits the amount of state and local taxes that taxpayers can annually deduct from their federal income to $10,000. This limitation is commonly referred to as the “SALT cap.” The SALT cap has stung many owners of Nebraska’s small and family-owned businesses who pay more than $10,000 in property and state income taxes, dampening the relief intended by the 2017 federal tax bill. PTET laws allow pass-through entities (entities taxed as partnerships or subchapter S corporations) to voluntarily elect to pay state income taxes on behalf of their owners. These laws, which have been approved by the Internal Revenue Service (Notice 2020-75) and adopted by almost all states that impose an income tax, avoid the impact of the SALT cap by shifting the tax from the business owner to the owner’s business, effectively creating a deductible business expense that is not impacted by the SALT cap. The impact of Nebraska’s PTET law impact will be company specific, but for many business owners, Nebraska’s PTET law could be worth anywhere from $29.60 to $37 of federal income tax savings for every $100 of Nebraska business income taxes paid. Businesses that are not eligible to voluntarily elect include single-member LLCs (unless they elect to be treated as a subchapter S corporation), sole proprietorships, trusts, and non-profit corporations. Like most other states, if a pass-through entity elects to voluntarily pay Nebraska income taxes on behalf of its owners, it is on behalf of all its owners. An owner of the pass-through entity does not have the ability to “opt-out” if the pass-through entity makes the PTET election. Net operating losses are not allowed to be used against pass-through entity taxable income. Further, to avoid state taxes being deductible from state income, the Nebraska PTET expense will be added back to taxable income for Nebraska state income tax purposes. Nebraska’s PTET tax rate is the highest individual rate (tax rates were changed in LB754). Following LB754’s enactment, Nebraska’s highest individual tax rates are scheduled to be: 6.84% for 2018-2022; 6.64% for 2023; 6.44% for 2024; 5.20% for 2025; 4.55% for 2026 (note that the SALT cap is scheduled to expire at the end of 2025); and 3.99% for 2027 and subsequent years. The PTET credit to owners is 100% of their distributive share of the PTET tax paid. The PTET credit is a refundable credit, where the owners receive the full amount to offset their Nebraska income tax due and could increase their Nebraska income tax refund. Nonresident individual owners of an electing passthrough entity with no other Nebraska activity would not be required to file a nonresident Nebraska income tax return. As for tiered structures, where a lower tier entity receives a PTET credit, the credit must be redistributed to its owners. When making an election, it is important to consider the effect of a PTET election on owners’ estimated payments and nonresident withholding requirements. While the PTET statute does not require estimated payments by electing pass-through entities until 2024, in order to take the deduction for taxes paid in 2023 (depending on whether the pass-through entity is a cash or accrual basis taxpayer), the pass-through entity must make its PTET payment in 2023. If a pass-through entity elects and pays its PTET for tax year 2023, the pass-through owners could avoid having to make NEBRASKA ENACTS PASS-THROUGH ENTITY TAX LAW BY JEFF SCHAFFART & NICK BJORNSON, KOLEY JESSEN COUNSELOR'S CORNER 16 Nebraska CPA
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