Nebraska Introduces PTET Law and Lowers Income Tax Rates

Written by
Brian M. Klintworth, CPA, MT
Partner | HBE LLP

June 1, 2023 — On May 31, Nebraska Governor Jim Pillen signed LB754 into law. This bill enacts several tax reforms, including the Pass-Through Entity Tax (PTET) and lowering the income tax rate for the state’s top individual and corporate income tax earners to 3.99% by 2027.

Nebraska’s PTET law allows pass-through entities, taxed as partnerships and Subchapter S corporations, to voluntarily elect to pay state income taxes on behalf of their owners. This effectively avoids the impact of the $10,000 state and local tax federal itemized deduction limit by shifting the tax from the business owner to the owner’s business. The entity may pay taxes from 2018 forward, allowing business owners to realize these tax savings for 2023 and prior tax years. While this new law will not lower state income taxes, it will allow business owners to save on federal income taxes by taking these taxes as a deduction against their business income.

This new law has the potential to positively impact Nebraskans, as it will reduce the tax burden for businesses and business owners. This will allow businesses to reinvest more money into their operations, which can lead to increased growth and job creation. Nebraska is now among 35 states that have enacted similar legislation over the past several years.

While the new PTET is retroactive to 2018, Nebraska plans to create a simplified process for claiming the credit for years before 2023. Filling the claim will be simpler than having to amend returns, although HBE is waiting for guidance from Nebraska on further details.

The move to lower the top income tax rates (currently 6.84% for individuals and 7.25% for corporations) will occur gradually, beginning for the 2023 tax year for individuals and the 2024 tax year for corporations until reaching the 3.99% rate for tax years beginning on or after January 1, 2027.

Guidance in Moving Forward

It is important for our clients to understand that this new law will also require them to take certain actions to ensure compliance. At HBE, we are committed to helping you navigate these changes and will be communicating more details as guidance emerges from the State. Our trusted advisors are available to answer any questions and provide guidance on how to take advantage of this Nebraska tax reform.