OFFICIAL PUBLICATION OF THE NEBRASKA SOCIETY OF CPAs ISSUE 3, 2023 PRESIDENT’S MESSAGE Society Leaders Visit Capitol Hill
■ Corporate Taxation ■ Partnership/LLC/Sub-S Entities ■ Estate & Gift Taxation ■ State & Local Taxation ■ Mergers & Acquisitions ■ Bankruptcy, Reorganizations & Restructuring ■ Tax Protests, Disputes & Litigation ■ Real Estate ■ Individual Taxation ■ Charitable Planning ■ Nonprofit Organizations ■ Employee Benefits & Executive Compensation A partnership that gets everyone where they want to go. You help your clients plot out prudent tax decisions. We can help them navigate the potential pitfalls and opportunities of today’s complex tax environments. Together, we can map out their routes to success. Contact Us Today. 402.390.9500 | koleyjessen.com/services-tax Helping CPAs statewide, Koley Jessen can be your tax law navigator.
IPE 1031 | 888.226.0400 | WWW.IPE1031.COM | INFO@IPE1031.COM EXPERTISE From a Respected Industry Leader THE PREMIER SPECIALIST FOR SECTION 1031 EXCHANGES SECTION 1031 EXCHANGE BOARD OF DIRECTORS LORRAINE A. EGGER CHAIRMAN (402) 965-0328 CyncHealth La Vista KELLY J. MARTINSON CHAIRMAN-ELECT (402) 827-2054 Lutz Omaha JODI M. ECKHOUT SECRETARY (308) 995-6151 Woods & Durham Chartered Holdrege DAVID E. SWAN TREASURER (402) 420-7758 SP Group, PC Lincoln GRANT H. BUCKLEY DIRECTOR (402) 444-1872 Buckley & Sitzman LLP Lincoln MEGAN C. HOLT DIRECTOR (402) 342-7600 Mutual of Omaha Insurance Co. Omaha BRIAN M. KLINTWORTH DIRECTOR (402) 423-4343 HBE LLP Lincoln SHARI A. MUNRO AICPA ELECTED REPRESENTATIVE (402) 963-4316 Frankel Zacharia LLC Omaha ERICA R. PARKS IMMEDIATE PAST CHAIRMAN (402) 431-9805 FORVIS LLP Omaha DR. THOMAS J. PURCELL, III DIRECTOR (402) 280-2062 Creighton University Omaha LINDA M. SCHOLTING DIRECTOR (402) 826-6777 Doane University Crete JESSICA L. WATTS DIRECTOR (402) 216-6116 Rehmann Omaha DANA J. WEBER WEST NEBRASKA CHAPTER PRESIDENT (308) 635-3008 Dana J. Weber, CPA Scottsbluff JONI SUNDQUIST NESCPA PRESIDENT & EXECUTIVE DIRECTOR joni@nescpa.org KELLY EBERT VICE PRESIDENT kelly@nescpa.org MICHELLE LYONS STAFF ACCOUNTANT & OFFICE MANAGER michelle@nescpa.org LORI VODICKA MEMBERSHIP & CPE ASSISTANT lori@nescpa.org OFFICERS BOARD MEMBERS NESCPA STAFF 3 www.nescpa.org
26 17 C O N T E N T S 6 ©2023 Nebraska Society of Certified Public Accountants | The newsLINK Group, LLC. All rights reserved. The Nebraska CPA is published six times each year by The newsLINK Group, LLC for the Nebraska Society of Certified Public Accountants and is the official publication for this society. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the Nebraska Society of Certified Public Accountants, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. Nebraska CPA is a collective work and as such some articles are submitted by authors who are independent of the Nebraska Society of Certified Public Accountants. While the Nebraska CPA encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at: 855.747.4003. ISSUE 3, 2023 EDITORIAL: The Nebraska Society of CPAs seeks to reflect news and relevant information to Nebraska and other news and information of direct interest to members of the Nebraska Society of CPAs. Statement of fact and opinion are made on the responsibility of the authors alone and do not represent the opinion or endorsement of the Nebraska Society of CPAs. Articles may be reproduced with written permission only. ADVERTISEMENTS: The publication of advertisements does not necessarily represent endorsement of those products or services by the Nebraska Society of CPAs. The editor reserves the right to refuse any advertisement. SUBSCRIPTION: Subscription to the magazine, a bi-monthly publication, is included in membership fees to the Nebraska Society of CPAs. PRESIDENT’S MESSAGE 6 Society Leaders Visit Capitol Hill By Joni Sundquist, Nebraska Society of CPAs 10 Who Are the Best Buyers When Selling an Accounting Practice? By Accounting Practice Sales 12 Relief for Inadvertently Invalid S Elections, QSub Elections, and Terminations By Katie R. Wunderlich & Hannah Fischer Frey, Baird Holm LLP COUNSELOR’S CORNER 15 Recent Updates to Nebraska Inheritance Tax Laws By James A. Tews & Nicholas W. O’Brien, Koley Jessen 17 What Can We Expect From GASB in the Second Half of 2023? By Joel Black, Chairman, Governmental Accounting Standards Board STATE TAX BRIEFING 19 2023 Nebraska Tax & Incentive Legislative Update Nebraska Makes a Move to Improve Its Competitive Business Climate By Nick Niemann & Matt Ottemann, McGrath North Law Firm DONOR ADVISED FUNDS & PRIVATE FOUNDATIONS 24 Questions to Ask Clients Interested in Charitable Giving By Tessa Barney, Omaha Community Foundation PRACTICE PERSPECTIVES 26 Where Are Your CPAs Going, Exactly? By Art Kuesel, Kuesel Consulting 28 2023 NESCPA Course Calendar 30 Members in the News 31 Firms in the News 33 Congratulations! 2023 Communicator Award Winner! 34 Welcome New Society Members!
LEADERS FROM THE NEBRASKA SOCIETY OF CPAS VISITED the offices of Nebraska lawmakers in Washington, D.C., in May to discuss a variety of issues important to the accounting profession. The trip was part of the American Institute of CPAs (AICPA) Spring Meeting of Council and Annual Members Meeting. Nebraska CPAs who joined me in attending the meetings included Society Chairman Lorraine Egger of CyncHealth in La Vista, Society Chairman-Elect Kelly Martinson of Lutz in Omaha, and Society Past Chairman and AICPA Elected Council Representative Shari Munro of Frankel Zacharia in Omaha. During the meeting, the governing body of the AICPA passed a resolution directing the organization to move forward with development of a national strategy focused on boosting the accounting profession’s talent pipeline. The resolution acknowledges the challenges facing the talent pipeline and the need for a “thoughtful strategic process” in the search for solutions while reiterating the Council’s commitment to preserving the mobility of CPA licensees. The resolution sets the stage for the AICPA to convene further strategy and implementation sessions with firms, state CPA societies, employers, regulators, educators, and other stakeholders. The visits to Capitol Hill were the highlight of the AICPA meetings. Nebraska CPAs advocated for support on four key federal issues, including a congressional resolution on the fiscal state of the nation, establishing the accounting profession as a STEM career pathway, simplifying the tax filing extension process, and expanding eligible SOCIETY LEADERS VISIT CAPITOL HILL BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAS PRESIDENT’S MESSAGE AICPA Immediate Past Chairman Anoop Mehta, Society President Joni Sundquist, Society Chairman Lori Egger, and AICPA Chairman Okorie Ramsey pose for a photo following the AICPA Council Meeting in Washington, D.C. 6 Nebraska CPA
uses of 529 savings plans to include fees and expenses required to obtain or maintain recognized postsecondary credentials, such as the Uniform CPA Exam. Nebraska CPAs shared valuable insights from the accounting profession with lawmakers and encouraged support for legislation that would benefit taxpayers and their advisors as well as improve tax administration. Society leadership highlighted principles of good tax policy as a foundation to create a more efficient tax system. We asked members of the Nebraska congressional delegation to support the following bills: The Simplify Automatic Filing Extensions (SAFE) Act (H.R. 3566), which would assist the IRS with receiving extensions earlier in the year, providing taxpayers, CPAs, and the IRS with a streamlined process and reducing the need for many penalty abatement requests; The Freedom to Invest in Tomorrow’s Workforce Act (H.R. 1477 & S. 722), which would expand eligible uses of 529 savings plans to include fees and expenses required to obtain or maintain recognized postsecondary credentials, including professional credentials and certifications, and provide accounting professionals with greater financial flexibility as they enter the workforce and seek to further their education; The Accounting STEM Pursuit Act (H.R. 3541 & S. 1705) to establish the accounting profession as a STEM career pathway, recognizing the value of accounting professionals, including CPAs, as technological leaders; and The Fiscal State of the Nation Resolution (H. Con Res 46 & S. Con Res 10), which would require the Comptroller General to make a presentation to a joint session of the House and Senate Budget committees on the Government Accountability Office (GAO) auditor’s report of the U.S. government’s financial statements. This resolution would promote greater transparency on the information included in the federal government’s financial report. There is no doubt that CPAs have weathered some of the most challenging times in the history of tax administration over the past several years, guiding individuals and businesses through significant changes. We are grateful to our members of Congress and their staff for taking the time to meet with us on these important issues. Nebraska Legislature Adjourns Nebraska Governor Jim Pillen signed LB754 into law on May 31, 2023, enacting several tax reforms. LB754 includes the Pass-Through Entity Tax (PTET) and lowers the income tax rate for the state’s top individual and corporate income tax earners to 3.99% by 2027. Nebraska’s PTET law will allow passthrough entities, taxed as partnerships and Subchapter S corporations, to voluntarily elect to pay state income taxes on behalf of their individual owners. This effectively allows individual owners to avoid the impact of the $10,000 state and local tax (SALT) federal itemized deduction limit by shifting the tax from the business owner to the owner’s business. The entity may pay taxes from 2018 forward, allowing business owners to realize this tax savings not only for 2023, but also for prior tax years. This new law will allow business owners to save on federal income taxes by taking these taxes as a deduction against their business income. Nebraska is now among 36 states that have enacted similar legislation over the past several years (see page 9). Watch for an article in the next issue of the Nebraska CPA magazine for details on the new PTET. In addition to PTET, LB754 also lowers the top income tax rates (currently 6.84% for individuals and 7.25% for corporations) gradually, beginning with the 2023 tax year for individuals and the 2024 tax year for corporations until reaching the 3.99% rate for tax years beginning on or after Jan. 1, 2027. All told, the Legislature passed 291 bills by creating numerous packages (aka Christmas Trees) in the 2023 legislative session. More information about the legislative session may be found on the Society website at www.nescpa.org/advocacy/news. Summer Conference Features Excellent Line-Up of Speakers The Society’s two-day Not-For-Profit and Governmental Accounting Conference drew approximately 130 registrants and 19 local and national speakers. The conference was held June 14-15 in Lincoln at the Nebraska Innovation Campus Conference Center, a new location for the combined event. A brand-new networking event was held at the end of day one of the conference. The “ABCs of Business Happy Hour” brought together approximately 75 attorneys, bankers, and CPAs, who enjoyed great views from Lincoln’s newest rooftop bar, the Barred Owl, on top of The Scarlet Hotel at the Nebraska Innovation Campus. The event was sponsored by the Nebraska State Bar Association and the Nebraska Bankers Association, in addition to the Nebraska Society of CPAs. New Leadership to Be Nominated The Society’s Nominating Committee will be meeting in late June to recommend new directors to serve on the Society Board as well as the chairman-elect for 2023-2024. Those individuals will be voted upon by the membership at the Annual Meeting, which will occur during the Fall Conference, Oct. 30-31, at the Crete Carrier Riverview Lodge, a beautiful new facility located at Mahoney State Park in Ashland. Join more than 200 of your peers at the Annual Meeting and Fall Conference by registering today at www.nescpa.org/conferences. 7 www.nescpa.org
City of Lincoln Attorney Yohance Christie, Jennifer Dougherty of West Gate Bank, and Lori Druse of Deloitte connect at the ABCs of Business Happy Hour at the Barred Owl rooftop bar in The Scarlet Hotel in Lincoln. Frank Crawford presented one of the breakout sessions at the 2023 NotFor-Profit & Governmental Accounting Conference, held June 14-15 at the Nebraska Innovation Campus Conference Center in Lincoln. From left to right, Society Chairman Lori Egger, Congressman Mike Flood, Society Past Chairman Shari Munro, Society President Joni Sundquist, and Society Chairman-Elect Kelly Martinson enjoy a westward view of the Washington Monument while touring the U.S. Capitol. Congressman Flood guided Nebraska CPAs through the U.S. Capitol Crypt, Rotunda, National Statuary Hall (aka Old Hall of the House), and the Hall of Columns. Earlier in the day, Society leaders had the opportunity to sit in the House Gallery during heated discussions concerning the debt ceiling limit. Board Retreat to Focus on CPA Profession Issues The Society’s annual Board of Directors Retreat will be August 23 at Hillcrest Country Club in Lincoln. Nebraska Board of Public Accountancy Executive Director Dan Sweetwood will join us for a State Board report, followed by a CPA profession issues update with AICPA Vice President of State Regulatory & Legislative Affairs Marta Zaniewski and National Association of State Boards of Accountancy (NASBA) Director of Legislative and Governmental Affairs John Johnson. Then, Society lobbyists Walt Radcliffe, Korby Gilbertson, and Justin Brady will discuss what to expect during the 2024 state legislative session with the Society Board. Women in Accounting Summit to Feature National Speakers The Society’s second annual Women in Accounting Summit is scheduled for Aug. 30 at the Crete Carrier Riverview Lodge at Mahoney State Park. Last year’s summit drew more than 120 attendees and we expect the 2023 event to be even bigger and just as inspiring! Among the nationally recognized speakers at the summit is Jennifer Wilson, co-founder of Convergence Coaching. Wilson is listed among Accounting Today’s Top 100 Most Influential People in Accounting, was named one of Inside Public Accounting’s Most Recommended Consultants, and was among AICPA and CIMA’s 25 Most Powerful Women in Accounting, to name a few of her accolades. Also on the agenda is Cynthia Cooper, former vice president of internal audit at WorldCom, who helped investigate and unearth $3.8 billion in fraud at WorldCom in 2002—the largest corporate fraud in U.S. history at that time. Cooper was named one of three “People of the Year” by Time magazine in 2002. Rounding out the summit will be Deloitte Well-Being Officer Jen Harris on life-work integration, Oh Hello CEO Natalie Micale on personal branding, and Dr. Connie Reimers-Hild on giving yourself permission to pursue your dream future. Register today at www.nescpa.org/conferences. Husker Tailgate Scheduled for Sept. 29 The Cornhuskers will be taking on Michigan at Memorial Stadium in Lincoln on Sept. 30. Whether you’re attending the game or not, you won’t want to miss the tailgate the night before. Hosted by the Nebraska Society of CPAs and the Associated General Contractors (AGC) of Nebraska, this second annual tailgate will be held just outside the NESCPA and AGC office building at 7435 O Street in Lincoln and will offer fun, games, and food and drink for all. Mark your calendars and stay tuned for details! Joni Sundquist is president and executive director of the Nebraska Society of CPAs. You may contact her at (402) 476-8482 or joni@nescpa.org. 8 Nebraska CPA
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BELIEVE IT OR NOT, WHEN SELLING AN accounting practice, the best buyer is not typically a larger firm. It is usually an individual, and frequently is a current employee of a practice near you, or someone coming from a large or regional firm who is looking for a platform to build on. This is true for a couple of reasons. First, existing firms often do not have the excess staffing capacity to handle the additional work. In a typical sale, the seller is ready to retire; at close, the buyer must be willing to assume the workload of the exiting practitioner and devote time to the transition. The reason a large firm buys an accounting practice is oftentimes different from an individual buyer’s reasons; and, even when they are similar, the reward for the individual buyer is greater. Firms are less motivated and less likely to carry a substantial amount of the risk involved in an acquisition, almost always insisting on a client retention agreement. When the potential buyer is an individual with several years of experience, who has dreamed of owning a practice, that buyer will be willing to bear more of the financial risk and assume greater responsibility for the client transition. The best buyer for an accounting practice grossing $2 million or less is an individual. They are motivated to pay a fair market price on terms acceptable to the seller, and they also have the time and energy to complete a smooth transition. The clients are happier because they move from one owner-operator to another—after all, who wants to talk to a staff member when they are accustomed to dealing with the owner? When you hear about clients leaving en masse after the sale of a practice, it is often because it was sold to a large firm and the clients were shuffled off to an unknown staff person. How would you feel? The purchasing firm isn’t concerned because they will only pay a percentage of gross collected; and, when there is no client, there is no gross collected. If you are selling an accounting practice, the very best buyers are experienced individuals who currently work for someone else. They recognize they are being paid “x” while billing “3x” for their employer; they are fed up with being an employee and want to work for themselves. The next best buyer is a small practice owner who wants to “take it to the next level.” They realize it’s much easier to purchase an existing practice than slowly build up the clientele via referrals and marketing. These small practice owners will often step up and compete with individual buyers. Occasionally, a large firm will become sufficiently motivated to compete with individual buyers, but it is a rare occurrence when they are willing to pay the same price, under the same terms, as a buyer who is purchasing a very good job. If you are selling an accounting practice, the very best buyers are experienced individuals who currently work for someone else. WHO ARE THE BEST BUYERS WHEN SELLING AN ACCOUNTING PRACTICE? BY ACCOUNTING PRACTICE SALES 10 Nebraska CPA
QUALIFICATION AS AN S CORPORATION MAY BE CRITICAL TO ACHIEVING A BUSINESS’ tax objectives; however, the S corporation rules contain many traps for the unwary. In particular, S corporations may inadvertently invalidate or terminate their S elections. Qualified subchapter S subsidiaries, or QSubs, may face similar issues. Section 1362(f) of the Internal Revenue Code provides relief for inadvertently invalid S elections, QSub elections, and terminations under certain circumstances; however, to actually obtain relief, a taxpayer may need to submit a private letter ruling (PLR) to the Internal Revenue Service (IRS), which can be an expensive and time-consuming process. The IRS has provided simplified procedures for taxpayers to obtain relief for noncompliance with the S corporation and QSub rules in Rev. Proc. 2022-19, which allows for retroactive corrective relief for inadvertently invalid and terminated S elections and QSub elections under certain circumstances, without requiring taxpayers to obtain a PLR. A. S Corporation & QSub Overview An “S corporation” is a small business corporation with a valid S election in effect. A “small business corporation” is a domestic corporation that is not an “ineligible corporation” (as defined in Section 1361(b)(2)) and that does not have: (A) more than 100 shareholders; (B) as a shareholder, a person (other than an estate, a trust described in Section 1362(c)(2), or an organization described in Section 1361(c)(6)) who is not an individual; (C) a nonresident alien as a shareholder; or, (D) more than one class of stock. An S corporation must timely file Form 2553, Election by a Small Business Corporation, to make an S election. An entity that does not qualify as a small business corporation pursuant to the requirements above cannot make a valid S election. A QSub is a domestic corporation that is not an ineligible corporation and is 100% owned by an S corporation, and which has a valid QSub election in place. The parent S corporation must timely file Form 8869, Qualified Subchapter S Subsidiary Election, to make a QSub election for an eligible subsidiary. A valid QSub election cannot be made for an ineligible subsidiary. A business with a valid S election may have such status inadvertently terminated by ceasing to continually qualify as a small business corporation. Similarly, an RELIEF FOR INADVERTENTLY INVALID S ELECTIONS, QSUB ELECTIONS, AND TERMINATIONS BY KATIE R. WUNDERLICH & HANNAH FISCHER FREY, BAIRD HOLM LLP 12 Nebraska CPA
eligible subsidiary with a valid QSub election may have such status inadvertently terminated if its parent’s S election terminates or if the subsidiary ceases to qualify as a QSub. B. Overview of Relief Under Section 1362(f) Section 1362(f) provides if an S election or QSub election is not effective by reason of the failure of the electing entity to satisfy the applicable requirements or to obtain the shareholder consents required for a valid election, or if such election is terminated, then, notwithstanding the circumstances resulting in such ineffective election or termination, the entity will be treated as an S corporation or QSub, as applicable, during the period specified by the Secretary of the Treasury, if three requirements are satisfied: First, the Secretary must determine that the circumstances resulting in the ineffective election or termination were inadvertent. Second, no later than a reasonable time after discovery of the circumstances resulting in the ineffective election or termination, steps must be taken to qualify as an S corporation or QSub, as applicable, or to obtain the required shareholder consents. Third, the entity for which the election was made and each shareholder must agree to make adjustments as required by the Secretary. C. Relief for Inadvertently Invalid Elections & Terminations Under Rev. Proc. 2022-19 Rev. Proc. 2022-19 identifies six areas for which common issues involving inadvertently invalid elections or terminations for S corporations or QSubs may be resolvable without a PLR. 1. Agreements With No Principal Purpose to Circumvent One Class of Stock Requirement An S corporation can have only one class of stock and will generally be treated thus if all outstanding shares confer identical rights to distribution and liquidation, considering provisions in the S corporation’s governing documents relating to distribution and liquidation. The Treasury Regulations identify a number of agreements and arrangements between or among an S corporation and its shareholders that may or may not be treated as creating a second class of stock, depending in part on whether a principal purpose of the arrangement is to circumvent the one class of stock requirement, or otherwise alter shareholders’ rights to distribution and liquidation proceeds. These arrangements include: (i) buy-sell agreements among shareholders, agreements restricting the transferability of stock, and redemption agreements; (ii) instruments, obligations, or arrangements treated as equity under general principles of federal tax law; (iii) short-term unwritten advances that fail a safe harbor set forth in the regulations; and, (iv) obligations of the same class that are considered equity under general principles of federal tax law but fail a safe harbor set forth in the regulations. Section 3.01 of Rev. Proc. 2022-19 provides that the aforementioned agreements and arrangements will not be deemed governing provisions and will not be treated as a second class of stock, so long as there is no principal purpose to use the agreement or arrangement to circumvent the one class of stock requirement. S corporations do not need to seek relief from the IRS for entering into these specific agreements or arrangements described in the regulations, and the IRS will not issue PLRs in such situations. 2. Governing Provisions That Provide for Identical Distribution & Liquidation Rights A “disproportionate distribution” is any distribution of property by an S corporation to its shareholders that differs in timing or amount from distributions with respect to other shares. An S corporation is generally not treated as having more than one class of stock so long as its governing provisions provide for identical distribution and liquidation rights for all shares; however, actual distributions that differ in timing and amount should be given “appropriate tax effect in accordance with the facts and circumstances” under the applicable Treasury Regulations. The IRS reports taxpayer confusion regarding when (and how) actual distributions will be given “appropriate tax effect,” notwithstanding governing provisions providing for identical distribution and liquidation rights. Section 3.02 of Rev. Proc. 2022-19 provides that the IRS will not treat disproportionate distributions as violating the one class of stock requirement, so long as an S corporation’s governing provisions provide for identical distribution and liquidation rights. S corporations do not need to seek relief from the IRS for disproportionate distributions and the IRS will not issue PLRs in these situations. 3. Procedure for Correcting Inadvertent Errors on Form 2553 or Form 8869 An inadvertent error or omission on Form 2553 or Form 8869 will not generally invalidate an S election or QSub election, unless the error or omission is with respect to: (i) a shareholder consent; (ii) selection of permitted year; or, (iii) an officer’s signature. The Treasury Regulations and previously issued Revenue Procedures provide relief for missing shareholder consents. Rev. Proc. 2013-30 provides relief for inadvertent errors regarding permitted year and for the missing signature of an authorized officer on Form 2553 or Form 8869. Section 3.03 of Rev. Proc. 2022-19 provides that errors and omissions on Form 2553 or Form 8869, other than the foregoing, may be corrected with an appropriate explanation in writing submitted to the IRS. The IRS will not issue PLRs in these situations. 4. Procedure for Verifying S Elections or QSub Elections Generally, within 90 days after the IRS receives Form 2553, the IRS will mail a CP261 Notice to the filer. For Form 8869, within 60 days, the IRS will mail a CP279 Notice to the filer and a CP279A Notice to the subsidiary. A lack of written acknowledgement from the IRS may create uncertainty for taxpayers regarding the validity of their S election or QSub election, though the lack of written acknowledgement does not affect election validity. 13 www.nescpa.org
Section 3.04 of Rev. Proc. 2022-19 provides that a replacement acknowledgement letter may be requested by an S corporation or its shareholders by contacting the IRS Business and Specialty Tax Line, and by practitioners by contacting the IRS Practitioner Priority Service. The IRS will not issue PLRs in these situations. 5. Procedure for Addressing Inconsistent Federal Income Tax Returns An S corporation or QSub may occasionally file a federal tax return that is inconsistent with its S corporation or QSub status. This may create complications for the filer but will not generally affect the validity of the S election or QSub election. Section 3.05 of Rev. Proc. 2022-19 provides that an S corporation or parent S corporation of a QSub that files a federal income tax return inconsistent with S corporation or QSub status, as applicable, should file a corrected or amended return. The IRS will not issue PLRs in these situations. 6. Procedure for Retroactively Correcting Non-Identical Governing Provisions An S corporation with governing provisions that provide for only one class of stock, with identical rights to distribution and liquidation proceeds, and which S corporation has not entered into any agreement or arrangement treated as a second class of stock, is referred to as having “identical governing provisions.” Conversely, a “non-identical governing provision” will result in an S corporation having more than one class of stock. An entity cannot make a valid S election while it has more than one class of stock, and an initially valid S election may terminate if its governing provisions later provide for more than one class of stock. Section 3.06 of Rev. Proc. 2022-19 provides that, notwithstanding the foregoing, an S corporation and its shareholders can obtain relief for an S election that is invalid or terminated solely as the result of non-identical governing provisions, and the S corporation will be treated as having a valid election from the date such provisions were first adopted. Retroactive relief is available if an S corporation: (i) has or had one or more non-identical governing provisions; (ii) did not make any disproportionate distributions to shareholders during the time period when the non-identical governing provisions were in effect; (iii) timely filed Form 1120-S for each taxable year during the relevant period; and (iv) before the non-identical governing provisions are discovered by the IRS, satisfies certain corrective procedures. To obtain retroactive relief for non-identical governing provisions under Rev. Proc. 2022-19, an S corporation must complete a “Corporate Governing Provision Statement” that satisfies the requirements of the Revenue Procedure. Among other requirements, the Corporate Governing Provision Statement must provide relevant information about the S corporation, its intended S election, and its shareholders and must explain the circumstances surrounding the adoption, discovery, and correction or removal of the non-identical governing provisions. The S corporation must also complete a Shareholder Statement, which must contain certain information about the S corporation and its shareholders. An S corporation that does not qualify for corrective relief pursuant to the procedures set forth in Section 3.06 of Rev. Proc. 2022-19 may request a PLR. D. Conclusion There are many traps for the unwary concerning S corporations and QSubs. Fortunately, not all inadvertent mistakes require a PLR. Rather, the Revenue Procedures set forth various situations that can be rectified through simple processes. To maintain compliance, practitioners should ensure that entities electing to be taxed as an S corporation or QSub do not violate one or more of the S corporation requirements, either in practice or via their governing documents. If a violation is discovered, practitioners should ensure that their client takes the proper steps to resolve the matter in a timely manner. Hannah Fischer Frey is a partner and Katie R. Wunderlich is an associate at Baird Holm LLP. Fischer Frey focuses her law practice in the areas of federal and state income tax law and business succession planning. Wunderlich’s practice focuses on tax-exempt matters, estate planning, corporate transactions, and federal and state tax planning issues. For more information, contact Fischer Frey or Wunderlich at hfrey@bairdholm.com or kwunderlich@bairdholm.com, respectively. To maintain compliance, practitioners should ensure that entities electing to be taxed as an S corporation or QSub do not violate one or more of the S corporation requirements, either in practice or via their governing documents. 14 Nebraska CPA
COUNSELOR’S CORNER EFFECTIVE JAN. 1, 2023, LAST YEAR’S passage of Nebraska’s LB310 resulted in various changes to Nebraska’s inheritance tax laws. These changes include adjusted tax rates and exemptions, a slightly adjusted classification of beneficiaries, and a new reporting requirement. The purposes of this article are to provide some background on Nebraska inheritance tax and to summarize the recent changes. As general, non-exhaustive background: Inheritance tax usually must be addressed when wrapping up the affairs of a deceased Nebraska resident (or a deceased nonresident who owned property located in Nebraska at death). Generally, the tax is imposed on assets that were: (i) received by an individual as the result of the decedent’s death, (ii) conveyed by the decedent to an individual prior to the decedent’s death in “contemplation” of death (e.g., certain gifts), or (iii) intended to take effect in possession or enjoyment by an individual after the decedent’s death. Revenue generated from inheritance tax typically is paid to the county in which the decedent resided at death (or, in the case of a non-resident, to the county in which property belonging to the decedent was located at death). Inheritance tax must be paid within one year of death; otherwise, interest on the unpaid tax will accrue at 14% annually, a penalty may be assessed, and the executor of the decedent’s estate may be required to give a bond to guarantee payment of the tax. Upon the decedent’s death, a statutory lien arises on all real estate owned by the decedent in Nebraska (unless the sole recipient is the decedent’s spouse) until the tax has been formally addressed, which can complicate a sale or use of such real estate as collateral for a loan. Life insurance proceeds received by a beneficiary other than the decedent’s estate and property received by the decedent’s spouse or children as a result of the homestead allowance, exempt property allowance, or family maintenance allowance are not subject to tax. The table below summarizes the recent adjustments to the tax rates and exemptions, by “Class” of beneficiary: Class 1: Grandparent, parent, sibling, lineal descendant (blood related and adopted), individual to whom the decedent for not less than 10 years prior to death stood in the acknowledged relation of a parent, and the spouse or surviving spouse of any such individuals. Class 1 Prior Rate New Rate Prior Exemption New Exemption 1% 1% $40,000 $100,000 Class 2 Prior Rate New Rate Prior Exemption New Exemption 13% 11% $15,000 $40,000 Class 3 Prior Rate New Rate Prior Exemption New Exemption 18% 15% $10,000 $25,000 RECENT UPDATES TO NEBRASKA INHERITANCE TAX LAWS BY JAMES A. TEWS & NICHOLAS W. O’BRIEN, KOLEY JESSEN 15 www.nescpa.org
FIND WHAT MATTERS Do you ever find yourself asking, “Is there something better out there?” You spend half your life at work, and we firmly believe you should love what you do. Our experienced team will help you find the right position at a great company where you can thrive. We are currently hiring for the following positions... ^ CFO ^ Controller ^ Financial Roles ^ Entry/Senior/Manager Level Accountants ^ Bookkeeper ^ Payroll Administrator ^ Remote CPA Positions LEARN MORE TODAY AT WWW.LUTZ.US/TALENT Class 2: Aunt, uncle, niece, or nephew, blood related or adopted, and a lineal descendant or spouse or surviving spouse of any such individuals. Class 3: An unrelated individual. In addition to those identified as Class 1 and Class 2 beneficiaries above, individuals who formerly would have been classified as Class 3 beneficiaries due to their relationship to a decedent only by marriage may now be classified as Class 2 beneficiaries, as the definition of “relatives” for purpose of the classification has been expanded to include relatives of a spouse or former spouse of the decedent’s relatives, if the decedent’s relatives were married to the spouse at the death of the decedent or such spouse. As a result of LB310 Nebraska law now provides that assets received by any individual who is under age 22 years at the decedent’s death, regardless of class, are entirely exempt from the inheritance tax. New Reporting Requirement Lastly, Nebraska law now mandates that personal representatives must submit a report to identify the number of resident and non-resident beneficiaries for each class, the total tax paid with respect to resident beneficiaries for each class, as well as the total inheritance tax paid with respect to each class. The report must be submitted to the county treasurer where the estate is administered, at the time estate assets are distributed from the estate. In turn, county treasurers now have an obligation to compile and submit an annual report to the Nebraska Department of Revenue (NDOR) regarding the data collected from personal representatives. As required by LB310, NDOR recently released its Estate County Inheritance Tax Report (Form ECIT) for use by personal representatives. James Tews and Nick O’Brien are attorneys at Koley Jessen, focusing their practices on estate planning and administration. They work closely with families, individuals, and business owners to develop comprehensive estate plans in line with their unique personal, financial, and business objectives and ensure the proper execution of those plans when the time comes. For more information, contact them at james.tews@koleyjessen.com or nick.obrien@koleyjessen.com, respectively. 16 Nebraska CPA
IN THIS ARTICLE, I WILL TALK ABOUT SOME OF THE KEY THINGS the Governmental Accounting Standards Board is working on and what’s on the horizon for the GASB. But before I do, there’s a matter of concern I would like to address. State and local governments are dealing with significant resource challenges, including workforce shortages. We know when we add to or change Generally Accepted Accounting Principles (GAAP), we are adding to those resource challenges. With this in mind, we are committed to not undertaking any new project unless the resulting change would represent a meaningful, substantial improvement in governmental financial reporting and those resulting benefits outweigh the costs and burdens we are placing on those who must implement the change. If you would like to talk with us about this, please reach out. Project Milestones The GASB is on track to issue or review the following documents in the second half of 2023: A new standard on the disclosure of certain governmental risks, An exposure draft on the classification of nonfinancial assets, and A post-implementation report detailing how the pension standards are working in practice. The Board also recently added a new project on accounting and financial reporting for infrastructure. Each of the key areas are highlighted below. Certain Risk Disclosures This standard will provide disclosure requirements for two categories of risk that governments face: concentrations (such as a principal employer) and constraints (such as a cap on property tax amounts). Providing financial statement users with information about these kinds of vulnerabilities would have a meaningful impact on their decision making and assessments of accountability. The Board plans to issue this standard in the third quarter. Nonfinancial Assets The GASB is reconsidering the existing classification of nonfinancial assets and other related sub-classifications, including capital assets or intangible assets. In our outreach, users told us that separate presentation or disclosure of different types of nonfinancial assets is important to them. We will issue the proposal for public comment in the third quarter and look forward to the feedback we receive on the types of improvements we are considering. Pensions The GASB’s pension standard issued in 2012 represented a monumental change in how governments report those significant liabilities. Reviewing the pension standards now that they’ve been in place for several years is critical to making sure they are functioning as intended. The final report on what we call “the post-implementation review” of the pension standards will be released to the Board and to the public before the end of the year. It will provide information on how the standards are working and what areas could potentially be improved. The Board will carefully evaluate the findings to determine whether a project addressing any potential changes to the pension standards is needed. We appreciate all our stakeholders who took the time to share their perspective in this important review process. That feedback is the lifeblood of the review—and helps ensure we come to the right decision going forward. The report is due for release in the fourth quarter of 2023. Infrastructure The research we have conducted over the last several years on capital assets, including infrastructure assets, has looked broadly at these areas across the full financial reporting model. Many people shared their perspective with us on how the model is working, what problems and challenges they see, and what information they are not receiving or could be improved. After carefully evaluating the staff’s research findings this spring and after taking into account the high level of interest from our advisory council, the Board made the decision to add a related project to the agenda focusing on infrastructure assets, which includes things like highways and sewer systems. Board deliberations on the project will begin shortly. WHAT CAN WE EXPECT FROM GASB IN THE SECOND HALF OF 2023? BY JOEL BLACK, CHAIRMAN, GOVERNMENTAL ACCOUNTING STANDARDS BOARD 17 www.nescpa.org
Learn more about these and other GASB projects through the Board’s Technical Plan page at www.gasb.org/techplan. Other Improvements Underway The GASB is also focused on internal measures to improve how we do our work, how we engage with our stakeholders, and the resources we provide to them. Earlier this year, we launched a new version of the Governmental Accounting Research System, or GARS. Learn more at https:// gars.gasb.org/Login. It is now available free of charge, and features a more modern interface, greatly improved search functionality, and other improvements. Feedback on this research tool has been highly positive. We are continuing to offer electronic input forms on our proposals to provide a convenient way for you to share your thoughts with the Board. We plan to feature an electronic input form for the upcoming proposal on nonfinancial assets mentioned earlier. The GASB has increased the resources dedicated to monitoring electronic financial reporting. This will allow us to be prepared to understand and adapt to the continuing evolution of government financial reporting, including advancements achieved through the use of technology. Finally, we have just launched a new podcast series called Bridging the GAAP that features informal discussions on key issues in governmental accounting, such as the Financial Data Transparency Act, and topics mentioned above. Final Thoughts As we look ahead to the GASB’s 40th anniversary in 2024, there is a lot to be excited about. We will be announcing more about our plans to recognize this important milestone, so please stay tuned. In closing, if members of the Nebraska Society of Certified Public Accountants have questions about anything mentioned in this article or have information to share with the GASB, please reach out at gasb.news@gasb.org. We are always happy to hear from you. The views expressed in this article are those of Joel Black only. Official positions of the GASB on accounting matters are determined only after extensive public due process and deliberation. Joel Black was named to a seven-year term as chairman of the Governmental Accounting Standards Board effective July 1, 2020. Prior to joining the GASB, Black was with Mauldin & Jenkins LLC in Atlanta. He joined Mauldin & Jenkins in 2004 as a director and was named partner in 2005 before his appointment to partner in charge of the audit practice in January 2019. Previously, he worked for KPMG LLP from 1992 to 2004. Contact us today to place your announcement ad Call 801-676-9722 Or scan the qr code to fill out the form. Who to congratulate , who to acknowledge , and who to thank for a job well done. Employees are motivated when they are recognized and feel valued. The Nebraska CPA magazine is a great platform to celebrate your team's accomplishments! 18 Nebraska CPA
STATE TAX BRIEFING 2023 NEBRASKA TAX & INCENTIVE LEGISLATIVE UPDATE NEBRASKA MAKES A MOVE TO IMPROVE ITS COMPETITIVE BUSINESS CLIMATE BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM IN OUR “NEBRASKA BUSINESS EXPANSION DECISION GUIDE,” we identified the 22 state and local site selection features most commonly considered by companies when deciding where to locate or expand a business. These 22 features collectively establish the framework for a state’s business climate. While this year’s Nebraska legislative session was memorable for a number of reasons, it was particularly noteworthy in regard to the state’s tax and incentive policies. The Legislature enacted several significant tax and incentive changes, which collectively improved the state’s business climate for attracting and retaining new business. These changes positively impact at least eight of the 22 state and local site selection features: Business State & Local Tax System Workforce Costs Quality of Life State & Local Incentives Skilled Workforce Personal State & Local Tax System Area Cost of Living Workforce Development Below we review some of the most significant tax and incentive changes. The Legislature did leave for another day a number of other important tax and incentive issues, which we also review. In 2016, 2017, and 2018, Nebraska ranked first in the United States in new projects per capita according to the annual report by Site Selection Magazine. By 2021 and 2022, Nebraska had fallen to fifth and 10th, respectively. Although various reasons exist for this, a significant reason for Nebraska’s decline is that other states have been more proactive to improve their business climates than Nebraska has. Overall, the Legislature accomplished a great deal in 2023 to improve Nebraska’s business climate. The Wall Street Journal Editorial Board was impressed. It had this to say in a June 6, 2023, editorial: “The gulf between high- and low-tax states keeps growing, and Nebraska is the latest to use budget surpluses to cut income and property taxes—and in a big way.” Of course, there is still more work to do, as Nebraska is looking to be—and to create a reputation for being—among the best states in which to do business. The annual business survey of U.S. CEOs 19 www.nescpa.org
by Chief Executive magazine rates states by CEOs’ impressions. Between 2020 and 2023, Nebraska’s state business climate has remained in the middle of the pack, moving from 28th to 26th to 28th and now to 24th (with No. 1 being the best). Nebraska, with a population of close to 2 million people, ranks 37th in population, with No. 1 being the largest state. While the size of the state may impact the CEOs’ opinions, 16 larger states rank worse than Nebraska (including California, New York, Pennsylvania, Illinois, New Jersey, Massachusetts, Minnesota, and Oregon), while three smaller states rank significantly better than Nebraska (Idaho, Delaware, and South Dakota). CEOs make the decisions, and their informed perception matters. Tax Changes Impacting Nebraska’s Competitive Business Climate Individual & Corporate Income Tax Rate Reduction As several states around the United States have acted to reduce income tax rates in the past few years, Nebraska needed to do so as well—or risk falling further behind in the race for tax competitiveness. Therefore, Governor Pillen lobbied for, and the Legislature passed, significant income tax rate reductions. For individuals, Nebraska’s top individual income tax rate will be reduced from the prior 6.84% top rate to a 3.99% top rate, on the following schedule: 6.64% rate for 2023, 6.44% rate for 2024, 5.20% rate for 2025, 4.55% rate for 2026, and 3.99% rate for 2027 and later years. Similarly, Nebraska’s top corporate income tax rate will be reduced from its prior 7.5% top rate to a 3.99% top rate, on the following schedule: 7.25% rate for 2023, 5.84% rate for 2024, 5.20% rate for 2025, 4.55% rate for 2026, and 3.99% rate for 2027 and later years. Impact of These Changes: As companies look to develop and retain their employment base, especially in this time of workforce shortages, these personal tax reductions are very attractive to companies looking to grow or relocate. As top tax rates are often considered in ranking states, this significant reduction in corporate taxes will also lead to a noticeable change in Nebraska’s competitive positioning as companies look to reduce their overall tax costs. Nebraska’s New Pass-Through Entity Tax The 2017 Tax Cuts and Jobs Act limited the amount of state and local taxes that individuals can annually deduct, as an itemized deduction, to $10,000. This limitation has impacted many Nebraska taxpayers, particularly owners of small to medium-sized businesses who pay well over $10,000 in Nebraska taxes (including both their income and property taxes). Nebraska’s new Pass-Through Entity Tax (PTET) law allows a pass-through entity, such as a partnership, LLC, or S corporation, to make a voluntary election to directly pay the Nebraska income tax generated by the entity’s activity. This tax is paid on behalf of the entity’s owners. This direct payment has two impacts. First, it may simply be more convenient for entity owners to have the taxes on their entity’s income be paid by that entity, rather than through their individual returns. Second, the payment of state and local income taxes by the pass-through entity constitutes a deductible business expense for federal income tax purposes. That expense is not limited by the $10,000 deduction cap otherwise placed on state and local income taxes for individuals, often allowing business owners to avoid part of the impact of that cap. In other words, the laws facilitate a real federal income tax savings. While the exact impact of this change will vary from business to business, many Nebraska business owners could see a federal income tax reduction of approximately $30 to $35 for each $100 of Nebraska income taxes paid. Nebraska’s new PTET law is, like those of certain other states, retroactive to 2018. Taxpayers need not file amended returns to take advantage of this change. Instead, a pass-through entity can simply elect to pay the Nebraska income taxes for a prior year sometime in 2023-2025, generating a federal income tax deduction in the year those taxes are paid. This payment will generate a refundable credit for the entity’s owners equal to their pro rata shares of the Nebraska income taxes paid. In addition, Nebraska’s resident credit was amended to allow a resident to claim a credit for elective entity-level taxes paid to another state, if the other state’s PTET is similar to Nebraska’s PTET. Impact of This Change: This will allow businesses to reduce their federal income tax liability, improving Nebraska’s competitiveness and letting companies know Nebraska is favorable regardless of the form of entity a company wishes to use. Tax Credits for Child Care The Nebraska Department of Revenue is authorized to approve up to $15 million each year in refundable income tax credits intended to help parents and legal guardians pay for childcare. Eligibility is based upon household income. A credit of $2,000 per child is available for households with income below $75,000, while households with income up to $150,000 may receive a credit of $1,000 per child. Because the credit is refundable, it can be received even if the credit exceeds the total tax liability of the parents or legal guardians. In addition, individuals, estates, trusts, and corporations may apply for a nonrefundable Nebraska income tax credit of up to $100,000 for contributions they make to eligible childcare programs. The Department of Revenue may annually approve $2.5 million in credits under this program. Impact of This Change: This will effectively reduce the cost of childcare, which will make Nebraska a more attractive place for young families to work and live. 20 Nebraska CPA
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