New Law Significantly Benefits Small Business Owners in Nebraska.

On May 31, 2023, Nebraska Governor Jim Pillen signed LB754 into law, marking a significant milestone in the realm of tax reform and relief for small business owners in the state. The legislation brings about a substantial change that directly affects how these small and family-owned business owners handle their state taxes, all while making the tax landscape more favorable for their endeavors.

Pass-Through Entity Tax (PTET) Law May Equate to Significant Federal Income Tax Savings

The primary highlight of LB754 is the introduction of the Pass-Through Entity Tax (PTET) law. This tax mechanism has its roots in the federal Tax Cuts and Jobs Act of 2017, which imposed a limitation on the amount of state and local taxes (commonly referred to as the “SALT cap”) that individuals could deduct from their federal income tax returns. This cap, while intended to streamline tax deductions, presented a significant challenge for many small and family-owned businesses in Nebraska. Owners of such businesses often found themselves paying more than $10,000 in property and state income taxes, causing the SALT cap to erode the intended tax relief from the 2017 federal tax bill.

PTET laws, like the one passed in Nebraska, allow pass-through entities, such as partnerships or subchapter S corporations (including LLCs taxed as partnerships and S Corporations), to opt to pay state income taxes on behalf of their owners. This mechanism, approved by the Internal Revenue Service and adopted by most states with an income tax, effectively shifts the tax burden from individual owners to the business entity. Consequently, it creates a deductible business expense at the entity level, sidestepping the SALT cap limitations and significantly benefiting small business owners in Nebraska.

The impact of Nebraska’s PTET law can vary from one business to another, but for many, it equates to substantial federal income tax savings. In other words, it puts more money back into the pockets of the hardworking individuals behind these businesses, fostering growth and economic stability within the state.

Noteworthy Features Include Retroactive Application

A noteworthy feature of Nebraska’s PTET law is its retroactive application, extending back to tax year 2018, similar to Colorado’s approach. Furthermore, the bill allows pass-through entities to voluntarily pay income taxes for previous years during 2023, 2024, or 2025, generating a federal income tax deduction for the year in which the prior-year taxes are paid without the need to file amended returns. The payment of these taxes by the pass-through entities will result in a refundable credit for their owners, equivalent to their pro rata or distributive share of the Nebraska income tax paid by the electing entity.

Small Business Owners can Manage their Income Taxes more Efficiently

Looking ahead, Nebraska’s new PTET law mandates the Tax Commissioner to establish the process and forms for making the PTET election. This election will allow small and family-owned business owners in Nebraska manage their state income taxes more efficiently and benefit from federal tax deductions. According to the Nebraska Department of Revenue’s website, the form to make a Pass-Through Entity Tax Election will be available beginning on September 1, 2023.