On May 31, 2023, Nebraska enacted an elective pass-through entity tax (PTET) regime. This new regime includes possible retroactive elections. Additionally, this new legislation includes reduced individual and corporate income tax rates (subject to phase-outs).
What is the Nebraska PTET?
Under this new regime, entities taxed as partnerships or S corporations (generally “pass-through entities”) can make an annual, irrevocable election to pay taxes at the entity level. Otherwise, the individual owners pay tax on their share of the pass-through entity’s income (with differing rules for in-state and out-of-state owners). This new PTET can allow owners to avoid the $10,000 deduction limit for state and local income taxes on their individual tax returns by making the PTET election (PTET payments are generally not limited to $10,000).
The election is generally due on or before the due date (including extensions) of the pass-through entity’s tax return. For purposes of computing the PTET, the highest Nebraska individual tax rate will apply.
Excess PTET payments can be treated as an overpayment that is refunded or applied to the following tax year.
Retroactivity of the Nebraska PTET
Pass-through entities can retroactively elect the Nebraska PTET for the tax years from 2018 to 2023. These retroactive elections must be made by December 31, 2025. Any individual income tax refunds resulting from a retroactive PTET can be claimed by the individual partners with yet-to-be-issued forms from the Nebraska Department of Revenue. Careful consideration should be given before any retroactive election is made because any retroactive PTET payments may not necessarily be deductible for federal income tax purposes.
Credit for Nebraska Residents
This new PTET regime also allows Nebraska’s resident taxpayers to claim a credit for PTET payments made to other jurisdictions.
Rate Reductions
Along with this new PTET regime, Nebraska also reduced individual and corporate income tax rates, subject to certain phase-out limitations. The highest individual and corporate income tax rates are scheduled to be at 3.99% by 2027.
Nebraska PTET Breakdown
Nebraska is the 36th jurisdiction to enact a PTET regime. This new legislation may allow taxpayers to fully deduct (for federal income tax purposes) their state income tax obligations, thus circumventing the $10,000 limit on state and local tax deductions. Additionally, the retroactive provisions may allow taxpayers to claim additional benefits, although it is uncertain whether the IRS will allow retroactive tax deductions.
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