On May 31, 2023, Governor Jim Pillen signed LB754 into law. LB754 adds a retroactive to 2018 pass-through entity tax, or PTET, law. Among other changes, LB754 is also scheduled to gradually reduce Nebraska’s top individual and corporate income tax rates to 3.99% by tax year 2027.
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 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 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.
In addition, Nebraska’s PTET law, like Colorado’s, is retroactive to 2018. The retroactive application of Nebraska’s PTET law will not require prior returns to be amended. Instead of amending prior returns, pass-through entities will be able to voluntarily elect to pay prior year income taxes during 2023, 2024 or 2025, which will generate a federal income tax deduction for the year in which the prior-years taxes are paid. A pass-through entity’s payment of these taxes will also generate a refundable credit for its owners equal to their pro rata or distributive share of the Nebraska income tax paid by the electing pass-through entity.
As for next steps, Nebraska’s new PTET law requires the Tax Commissioner to establish the form and manner of making the PTET election. We anticipate that these initial forms will be available prior to the end of 2023.
