On May 31, 2023, Nebraska Gov. Jim Pillen signed Legislative Bill 754 into law, making Nebraska one of the latest states to adopt a workaround to the federal $10,000 state and local tax deduction limitation on individual taxpayers. In general, the workaround allows an electing pass-through entity (PTE) to transfer the imposition of the state income tax and the benefit of the state tax deduction to the entity, thereby allowing the state tax deduction to pass through to owners on their Schedule K-1 as a reduction to gross income without the $10,000 limitation.
More than 30 states have enacted PTE tax legislation, but Nebraska’s model is unique because the election can be made retroactively to tax years beginning on or after January 1, 2018. The time frame to make this irrevocable retroactive election will begin as soon as the Nebraska Department of Revenue (NDOR) establishes procedures for making the election and will end on December 31, 2025. It’s expected that the NDOR will design new amended returns for PTEs to make the election. PTE owners will have until the later of the prescribed statute of limitations or January 31, 2026 to claim a refund of taxes previously paid on income taxed under a PTE’s retroactive election.
For tax years beginning on or after January 1, 2023, the annual PTE election must be made on or before the due date of the PTE’s income tax return, including extensions. Currently, it’s anticipated the NDOR will modify existing PTE income tax returns and Forms K-1N to incorporate the election. Pertinent aspects of the new election are as follows:
- The election will be binding on all PTE owners, and the tax will be calculated on the PTE’s income apportioned or allocated to the state, regardless of whether PTE owners are residents or nonresidents.
- Tiered PTE structures can choose to pass the refundable credits of electing partnerships to their owners or apply the credits against their own tax, penalty, and interest.
- The applicable tax rate will be equivalent to the highest rate applicable to individuals per Nebraska Code Section 77-2715.03, currently at 6.64% for 2023 with scheduled annual decreases through 2027, arriving at a top rate of 3.99%.
- C corporation estimated tax requirements will apply for electing PTEs, but no payments will be required for tax years beginning prior to January 1, 2024. Nebraska Forms 1065N-V and 1120N-V will likely be used for estimated tax payments.
- PTE owners will be entitled to a refundable tax credit equal to their distributive share of the tax paid by the electing PTE.
- The electing PTE’s filing will satisfy the filing obligation of nonresident individuals if their distributive share of income from the electing PTE is their only source of Nebraska income, and their share of tax is paid by the PTE.
- Net operating loss carryforwards will not be allowed on electing PTE returns.
- Nebraska residents invested in PTEs other than S corps and LLCs will be entitled to a credit for PTE taxes paid to other states. Nebraska residents invested in S corps and LLCs will continue to make the S corp and LLC non-Nebraska income adjustment for their share of non-Nebraska income from a PTE.
Individual taxpayers should consider whether they may be able to reduce their quarterly estimated tax payments for 2023 if they own a PTE that will make the election in Nebraska.
FORVIS will continue to monitor any updates pertaining to this legislation. If you have any questions or need assistance, please reach out to a professional at FORVIS or submit the Contact Us form below.