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Here’s the latest: This session proposes detrimental changes in the income tax treatment to certain Nebraska companies who own Subchapter S corporations and limited liability companies taxed as partnerships (“pass-through entities”). We’re advocating to prevent these damaging potential outcomes. Read our letter to senators below, and join us in preventing negative change.
Members of the 106th Legislature:
Several legislative bills introduced this session propose detrimental changes in the income tax treatment to Nebraska residents who own Subchapter S corporations and limited liability companies taxed as partnerships (“pass-through entities”).
LB 276 (and similar provisions included this year in LB 314 and LB 614) would repeal and reverse legislation enacted by a previous Legislature in LB 773 in 1987. This prior legislative bill was enacted to provide identical approaches for C corporations (using existing law) and for S corporations (new law in LB 773) to apportion their multi-state income among the states in which the respective entities do business. In LB 773, the Legislature was responding to provisions of the federal Tax Reform Act of 1986. The Tax Reform Act caused a wave of new S elections, by much larger corporations that are more likely to do business in more than their home state, than corporations which had historically made the S election. LB 773 was also enacted to assure state income tax parity between Nebraska resident shareholders and non-resident shareholders. Under the provisions of LB 773, the Nebraska tax owed by residents and non-residents on Nebraska source pass-through income is identical.
Because Nebraska individual income tax rates are higher than the rates in most nearby states, repealing the pass-through apportionment provisions in LB 773 would result in Nebraska resident shareholders of multi-state S corporations and LLCs owing significantly more Nebraska state income tax than non-residents would owe on the identical income. We believe that it is not good policy to treat non-residents better than our residents.
LB 773 has successfully provided fair and equal treatment for the owners of Subchapter S corporations and LLCs for 32 years. Nebraska should not be changing a tax approach that is working, and on which Nebraska businesses have relied.
In addition, prior Legislatures also adopted LB 559 in 1995 and LB 872 in 2012. Those legislative bills were enacted to keep Nebraska businesses competitive with similar business in neighboring states, which had adopted similar legislation. Both of those important tax changes apply equally to C corporations and to S corporations and LLCs.
While the current proposals do not mention either the subjects of LB 559 or LB 872 by name, a side-effect of LBs 276, 314, and 614 would be to indirectly repeal the provisions of both LB 559 and 872 for S corporations and LLCs only. C corporations would not be affected. Without apportionment, all sales of both tangible products and of services and intangibles would be treated by pass-through entities as Nebraska sales. This would create a material new disparity between how Nebraska taxes C corporation income and most pass-through income, and it would create a material competitive disadvantage for Nebraska pass-through entities compared to pass-through entities located in other states.
Our businesses are long standing Nebraska companies with deep connections to our State. We choose to support Nebraska with our business investments and expansion and our businesses are an integral part of the Nebraska economy. Do not penalize us for being a pass through entity that generates significant revenue outside the state of Nebraska.
Given that pass-through businesses are very material to Nebraska’s economy, and the material adverse impact that LBs 276, 314, and 614 would have on these businesses, we want to make you aware of our concerns. We strongly believe these proposals would have significant adverse consequences for Nebraska businesses and for the State of Nebraska as a whole.
In our opinion, the need to find ways to grow Nebraska has never been more important. This legislation does not help achieve that objective. In fact, we believe the impact would be just the opposite.
A competitive tax is vital to strengthening Nebraska’s economy. The existing law is good tax policy that is equitable to all businesses, both C Corporations and pass-through companies. A high percentage of Nebraska businesses report their income on individual returns, making it especially important to keep parity between C Corporation and pass-through taxation.
We appreciate having this opportunity to share our concerns and to provide our input on this important issue. We know that these are complex proposals. We look forward to an opportunity to discuss with you your perspective on this legislation, and to answer questions you may have.
We know your job is a difficult one and we greatly appreciate your willingness to serve our state.
President and CEO, Garner Industries
CEO, DMSi Software
President and CEO, Lozier Corporation
President and CEO, Walnut Radio
Owner, Heavy Duty Specialists,Inc
Executive Co-Chair, American National Bank
John D. Fonda
CEO, John Day Company
Vice President, Tevra Brands LLC
Vic and Nick Sowl
Owners, Central Nebraska Wood Preservers, Inc.
Justin C. Osborne
President, Industrial-Irrigation Services
President, Phillips Manufacturing Co.
President, Nebraska Chamber of Commerce and Industry
President, Pinnacle Bancorp
Chairman, Tenaska, Inc.
CEO and Chairman, Crete Carrier Corporation
Chairman, McCarthy Group, LLC
President/Owner, Omaha Track, Inc.
Chairman, First State Bank
Board Chair, Banner Capital Bank
CEO, Tek Brands, LLC
Chairman, TLC, Inc.
David G. Brown
President and CEO, Greater Omaha Chamber
President, Speedway Motors
CEO, Cassling Diagnostic Imaging
EVP and Co-Founder, Buildertrend
President and CEO, Mapes Industries
CEO, Catch Intelligence
Michael J. Nelson
Chairman, FirsTier Bank
Philip M. Burns
Chairman, F&M Bank
Chairman, Points West Community Bank
John H. Nelson
President, SilverStone Group
Executive Director, Renewable Fuels Nebraska
President, Standard Nutrition Company
President and CEO, Lincoln Chamber of Commerce