Pass-through entity tax law would address dire need of Nebraska’s competitiveness

Such a PTET law would ease tax burden for small and family-owned businesses – without shrinking tax collections

February 9, 2023 3:00 am

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In announcing six priority bills aimed at transforming Nebraska’s tax code on Jan. 18, Gov. Jim Pillen stated: “Our current tax system fails to make Nebraska competitive.” While advocating for these bills, Gov. Pillen further stated on Feb. 3 there is a “dire need” for Nebraska to remain competitive.

As explained below, amending one of these bills to add a voluntary, retroactive pass-through entity tax law, or PTET law, would address this dire need and provide many Nebraska business owners with federal income tax relief. Better still, a PTET law would not cost the state any tax revenue — that’s right, zero decrease in the tax revenue that Nebraska collects.

By way of background, the Tax Cuts and Jobs Act of 2017 generally limits the amount of state and local taxes that taxpayers can annually deduct from their federal income to $10,000. This limitation is commonly referred to as the “SALT cap.” The SALT cap has stung many owners of Nebraska small and family-owned businesses who pay more than $10,000 in property and state income taxes, dampening the relief intended by the 2017 federal tax bill.

According to Nebraska Department of Revenue data, for tax-year 2019, over 59,000 tax returns for so-called pass-through entities (where the income generated by a business passes through to its owners, with the owner then being responsible for paying applicable income taxes) were filed in Nebraska. Almost all of these companies, which are formed as subchapter S corporations or partnerships for tax purposes, are small and family-owned businesses. The SALT cap squarely hits these Nebraskans, too often leading to a higher federal income tax bill.

To provide SALT cap relief, 29 states have enacted and seven additional states have proposed PTET laws that allow pass-through entities to voluntarily elect to pay state income taxes on behalf of their owners. These PTET laws, which have been approved by the Internal Revenue Service, avoid the impact of the SALT cap by shifting the tax from the business owner to the owner’s business, effectively creating a deductible business expense that is not impacted by the SALT cap. Said another way: A PTET law would have no impact on the income taxes collected by Nebraska, but, by providing a SALT cap workaround, would create federal income tax savings for many Nebraska business owners.

A PTET law’s impact would be company-specific, but for many business owners, enacting a Nebraska PTET law could be worth anywhere from $29.60 to $37 of federal income tax savings for every $100 of Nebraska business income taxes paid.

Not adopting a PTET law disadvantages Nebraska’s business owners. Today, Nebraska is one of just five states that impose an individual income tax that have not yet enacted or proposed a PTET law. Regionally, our neighbors, Colorado (which adopted a PTET law that is retroactive to 2018), Kansas, Iowa,and Missouri have all enacted or proposed PTET laws. South Dakota and Wyoming do not need a PTET law because they do not impose an individual state income tax. To level the playing field for our business owners, it is imperative that Nebraska quickly enact a PTET law. As Gov. Pillen observed, “We would all agree that we can’t get beat by Iowa, not a chance.”

To address the dire need of Nebraska’s competitiveness and provide tax relief to many Nebraska business owners, Nebraska should follow Colorado’s lead by enacting a PTET law that, like Colorado’s, applies retroactively, allowing business owners to realize this tax savings not only for 2023, but also for prior tax years. Delivering tax relief like this would advance Gov. Pillen’s agenda of “making our state’s tax system more competitive with other states” and “provid[ing] Nebraskans with the tax relief they need.”

Finally, enacting a PTET law makes even more sense considering that it would not negatively impact Nebraska’s income tax collections.

I urge our state senators to amend one of the many pending bills to add a retroactive PTET law and further urge Gov. Pillen to sign retroactive PTET relief into law. A PTET law is the type of practical tax reform and relief that Nebraskans deserve and is something we should expect our leaders to deliver.

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Jeffery R. Schaffart
Jeffery R. Schaffart

Jeff Schaffart, of Omaha, is a business and tax attorney. He chairs Koley Jessen’s tax practice. All opinions expressed are his own.