For Nebraska business owners who operate a pass-through entity in Nebraska, an S-corporation or partnership, there’s good news on the income tax front. Nebraska recently enacted LB647, making it easier for Nebraska businesses to reduce federal taxes through a special election known as the Pass-Through Entity Tax (PTET) election.
Federally, the "One Big Beautiful Bill" (OBBB), a sweeping federal tax package that includes new deductions and compliance updates, especially related to the Employee Retention Credit (ERC), was recently enacted.
Nebraska LB647: Simpler PTET Process, Faster Tax Relief, and Clearer Tax Deficiency Notices
In 2023, Nebraska adopted a PTET law (via LB754), retroactive to 2018. PTET laws allow pass-through entities to pay state income tax at the entity level, rather than having their owners pay it personally. This shift allows individual owners of pass-through entities to effectively deduct the state income taxes paid by the pass-through business from their federal income, even if they would not be able to claim this deduction because of the $10,000 cap on state and local tax (SALT) deductions that came from the 2017 federal tax law.
Now, LB647 makes it easier and more efficient to make a Nebraska PTET election and claim related tax credits:
- Simplified election: Starting with tax years beginning on or after January 1, 2023, businesses can now make a Nebraska PTET election directly on their Nebraska income tax return. There is no need to make the election separately from the entity income tax return.
- Flexibility for timing of credits: Shareholders or partners do not need to cause their pass through entity to make the Nebraska PTET payment in the same tax year to claim the related Nebraska credit. Under LB647, they can make the PTET election for a given year (e.g., 2024) and still claim the credit on their personal returns for that same year, even if the actual payment is made in the following year when the PTET return is filed (e.g., in 2025 for tax year 2024). This change only impacts the Nebraska credit. It does not impact the timing of the federal deduction, which will continue to be deducted for the tax year in which the PTET payment is made.
In addition, LB647 requires the Nebraska Department of Revenue to send a written notice detailing the facts, circumstances, and reasons the Tax Commissioner used to determine the deficiency when issuing a deficiency notice. This taxpayer friendly change is expected to make it easier for taxpayers to respond to or dispute errors and to know the alleged grounds for a deficiency notice.
The authors of this alert drafted and submitted proposed legislation that state senators ultimately used in LB647. They collaborated with the Omaha and State Chambers of Commerce and testified in front of the Nebraska Unicameral’s Revenue Committee in support of these reforms to make the PTET process more user-friendly and the deficiency notice process more transparent and fair for Nebraska taxpayers.
Federal Tax Changes: SALT Relief, Bonus Depreciation, and ERC Crackdown
The federal “One Big Beautiful Bill” (OBBB) also made significant tax changes that impact business owners. If you filed an Employee Retention Credit (ERC) claim, take note, the rules have changed.
- Temporarily Higher SALT Cap
- Starting in 2025, the SALT deduction cap increases from $10,000 to $40,000 for individuals and married couples filing jointly.
- The increased cap phases out for households earning over $500,000 in modified adjusted gross income.
- This increased SALT cap and income threshold will increase by 1% per year until 2029, but the SALT cap will return to $10,000 in 2030.
- Importantly, the OBBB does not affect state PTET laws, so this income tax savings strategy remains valuable.
- Deductions for Investments and R&D
- Bonus depreciation is back: The bill restores and makes permanent 100% bonus depreciation under Section 168(k), allowing businesses to immediately deduct the full cost of certain equipment and property.
- Research & development: A new Section 174A brings back more generous deductions for research and experimentation expenses, similar to pre-2017 rules.
- Section 199A made permanent: Owners of pass-through businesses can continue deducting 20% of qualified business income permanently, this deduction was set to expire in 2025.
- Expansion of the Section 1202 Qualified Small Business Stock (QSBS) Exclusion
- Shorter holding period: Qualifying taxpayers only need to hold their QSBS for 3 years to claim part of the Section 1202 exclusion.
- Tiered exemptions: With the shorter holding period, amended Section 1202 provides tiered exclusions based on the holding period – 50% for stock held for 3 years, 75% for 4 years, and 100% for 5 years.
- Raised limits: The OBBB raises the cap on a taxpayer’s per-year exclusion to the greater of $15,000,000 or 10 times the taxpayer’s basis in the QSBS, and increases the QSBS issuer gross asset limit to $75,000,000. Both will be indexed for inflation.
- Renewal of the Section 1400Z-1 Qualified Opportunity Zone (QOZ) Incentives
- Permanence: The OBBB makes the QOZ program permanent, subject to rolling 10-year designation periods. The first opportunity zone designation date under the OBBB is July 1, 2026.
- Gain deferral: The deferral period for capital gains in a Qualified Opportunity Fund (QOF) is now no later than 5 years after the date of investment.
- Basis step-up for rural areas: An investment held for at least 5 years in a “qualified rural opportunity fund,” a new designation under the OBBB, earns the investor a step-up in basis equal to 30% of the deferred gain.
- Additional reporting requirements: The OBBB imposes new reporting requirements, including new Sections 6039K and 6039L, for both QOFs and QOZ businesses. Existing QOF and QOZ sponsors must address their new reporting obligations.
- The ERC: New Deadlines and Penalties
- Statute of limitations extended: The IRS now has six years (up from three) to audit ERC claims.
- Immediate clawbacks allowed: The IRS can now assess and reclaim ERCs without completing a full audit.
- New penalties: The Section 6676 20% penalty also now applies to incorrect ERC refunds of employment taxes, unless the refund was due to reasonable cause. The IRS is also targeting promoters, preparers, and businesses involved in ERC “schemes” with elevated penalties.
- ERC claims suspended: Any ERC claims for the third quarter of 2021 filed after January 31, 2024, are suspended, unless already processed before July 4, 2025. IRS processing delays could thus leave some businesses without refunds—even if they filed on time.
Koley Jessen’s Tax Practice Group is actively advising clients on how to navigate the evolving landscape of federal and state tax law. If you have questions about how these new provisions, from Nebraska’s streamlined PTET process to the wide-ranging changes under the “One Big Beautiful Bill,” please reach out to a member of our team.
