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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