In 2023, the Nebraska Legislature passed a bill that allows a partnership or S-Corp to elect to pay its state income taxes. Previously, because the income from the partnership or S-Corp is passed through to the owner, the owners of the entity paid the taxes at their own individual tax level.  

In 2018, the federal government passed the Tax Cuts and Jobs Act (TCJA), which limited the itemized deduction for state and local taxes in the individual’s return to $10,000. This prompted many states to adopt laws like the new Nebraska law to work around this limitation. Federal tax law allows entities to deduct state income taxes paid as an ordinary business expense, but for most states this has only been allowed for C-corporations since they are the only entity to pay their own taxes. The pass-through entity tax law expands that option. 

A pass-through entity can make a binding election each year, by the due date of the tax return, to pay the state income taxes for its owners. The tax is calculated at the highest individual tax rate (currently 6.84%). The owners then receive a credit for this tax paid, which they will report on their individual return. The benefit comes because there is a federal tax deduction for the state tax paid. The drawback is the entity will need to make estimated tax payments (even if it is a farming partnership), starting Jan. 1, 2024, if they decided to make this election. The amount of the benefit will vary depending on the individual’s federal tax rate. 

The big question coming from this tax law will be if those who do not currently have a pass-through entity should form one now. The answer is the age-old best tax answer: It depends!

Read this article on the Center for Ag Profitability to learn more about the pass-through entity tax law and its potential benefits for your operation.

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