Nebraska + Iowa Enact Pass-Through Entity Tax Laws

Iowa and Nebraska enacted Pass-Through Entity Tax (PTET) legislation during the 2023 legislative sessions, joining 33 other states that allow PTET. We will discuss the impact these new laws can have on individuals and businesses.

Understanding Pass-Through Entity Tax

Pass-through entities, such as partnerships and Subchapter S corporations, do not pay income tax at the entity level. Instead, the income, deductions, and credits "pass through" to the individual owners, who report them on their personal income tax returns.

PTET laws allow these entities to elect to pay tax at the entity level, shifting the tax liability from individual owners to the entity itself. Thereby allowing individual owners to avoid the federal $10,000 state and local tax itemized deduction limitation that would apply if they paid tax individually.

Nebraska PTET Law

Nebraska’s Legislative Bill 754 includes the following details related to PTET:

• Retroactive to tax year 2018.
• Amended returns for 2018-2022 must be filed by 12/31/25, and a PTET-only amended form may be created to simplify the filing process.
• The PTE tax will be calculated on apportioned income.
• The PTE tax rate is 6.84% for 2018-2022 and 6.64% for 2023, aligning with the top individual tax rate.
• Owners receive a refundable credit equal to 100% of their share of PTET paid by the entity.
• PTET estimated payments required for tax years beginning 1/1/24 or later.

Iowa PTET Law:

Iowa’s House Filing 352 includes the following details related to PTET:

• Retroactive to tax year 2022.
• The PTE tax will be calculated on apportioned income.
• PTE Tax Rate is 8.53% for 2022 and 6% for 2023.
• Owners receive a refundable credit equal to 91.47% of their share of 2022 PTET paid by the entity (94% for 2023, with the credit percentage increasing in future years as individual tax rates decrease).
• PTET estimated payments required for tax years beginning 5/11/23 or later.

Lutz anticipates it may take several months for the Iowa and Nebraska Departments of Revenue to update their tax forms and systems to allow for PTET elections. As a result, original or amended PTET returns are not expected to be filed until after December 31, 2023.

In addition to PTET, Nebraska passed several other tax changes, including a reduction in income tax rates over time to 3.99% by 2027. Contact your Lutz representative with any questions about how these PTET taxes may impact you or your business.