The Nebraska Society of CPAs has been collaborating with the Nebraska Department of Revenue (NDOR) on the implementation of the new Nebraska Pass-Through Entity Tax (PTET).
The Society identified an issue with the NDOR's position regarding the timing of Nebraska PTET credits. The NDOR's initial stated position was that the credit is available for the same tax year as the deduction on the federal return. If a pass-through entity makes a 2023 PTET election but made the payment in 2024 and takes the deduction on the 2024 federal return, the partners and shareholders would not be able to use the credit to offset the income from that pass-through entity to offset their 2023 income from the entity. Instead, the credit would be available to offset their 2024 state income tax.
We felt it was important for the credit to match up with the tax in the same year. If a pass-through entity makes a 2023 PTET election and pays the tax, the partners or shareholders should not have to make a duplicate payment to the state for 2023 income tax on that same income.
The Society has invested a substantial amount of time and resources in researching the issue, reviewing other states' PTET procedures and discussing with the NDOR. This morning, we spoke with NDOR representatives and they confirmed they intend to change their position about the timing of the credit. They advised that the credit for the 2023 PTET will be able to offset the partner's/shareholder's 2023 taxable income, even if the payment is not deducted on the 2023 Federal Form 1065 or Form 1120S.
The partners of a partnership or shareholders of an S corporation that elects PTET for 2023 will be able to use the corresponding credit to offset their 2023 Nebraska taxable income, regardless of whether the tax was deducted on the 2023 Federal Form 1065 or Form 1120S. The payment of the entity's PTET must be made no later than with the filing of Form 1065N or Form 1120SN in 2024.
In addition, NDOR has revised its position on the timing of credits for retroactive elections. You can report a 2018-2022 retroactive PTET credit on the 2023 Form 1065N or Form 1120SN and pass through a 2023 PTET credit on the corresponding K-1N to the partners/shareholders for any retroactive elections filed and paid up through the filing of the 2023 Form 1065N or Form 1120SN. This will drastically reduce the amount of time the state is holding the money until when the partners/shareholders can get the money back.
The Nebraska Department of Revenue is planning to update its FAQs, forms, and instructions accordingly.
