Financial Planner, understanding Nebraska’s new pass-through entity tax election

We had a chance to talk to Bryan Frew, CPA, about Nebraska’s new pass-through entity tax election and why it is important.

What is Nebraska’s new pass-through entity tax election and why is it important?

The pass-through entity tax, better known as PTET, came into play when the Tax Cuts and Jobs Act of 2018 limited the state and local tax itemized deduction to $10,000, effectively making state tax paid non-deductible for most individuals.

Because of this, states started giving pass-through entities, namely partnerships and S-corporations, the ability to pay their state tax liability at the entity level rather than the taxable income being passed to the individual partners and shareholders.

Now with the Nebraska PTET election, small business owners will receive a federal tax deduction for state taxes paid on business income earned.

How would a taxpayer make the election to pay these state taxes at the company level?

The election is made by the S-Corporation or the Partnership. The state taxes are paid by the company; that payment is deducted on the federal return as a deductible expense.

The amount of the payment is reported on the partner or shareholder’s K-1N based on ownership and claimed as a tax credit on the individual owner’s tax return. Nebraska has decided to make the election retroactive to 2018.

I would recommend anyone who manages the taxes of an S-Corporation or partnership to contact their tax advisor to see how this election could help them save.