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Pass-Through Entity Tax (PTET) FAQs
This guidance document is advisory in nature but is binding on the Nebraska Department of Revenue (DOR) until amended. A guidance document does not include internal procedural documents that only affect the internal operations of DOR and does not impose additional requirements or penalties on regulated parties or include confidential information or rules and regulations made in accordance with the Administrative Procedure Act. If you believe that this guidance document imposes additional requirements or penalties on regulated parties, you may request a review of the document.
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ELIGIBLE ENTITIES:
What pass-through entities are eligible to make the PTET election?
Eligible partnerships and S corporations. An eligible partnership includes any entity, including a limited liability company (LLC), treated as a partnership for federal income tax purposes. An eligible partnership does not include a publicly traded partnership. An eligible S corporation is any entity subject to taxation under subchapter S of the Internal Revenue Code and related Treasury Regulations.
Can a disregarded LLC make the election?
No, a disregarded LLC cannot make the election. However, a partnership or S corporation that owns a disregarded LLC may make the PTET election.
Can financial institutions make the election?
Financial institutions that file a Nebraska S corporation return may make the PTET election. A financial institution that has an ownership interest in an S corporation or partnership may claim its share of the PTET paid by the S corporation or partnership.
Is an eligible pass-through entity required to make the election each year?
A pass-through entity is required to make a separate election for each tax year it wants to be subject to Nebraska income tax. Once the election is made for a tax year the election is irrevocable and binding on the pass-through entity and its owners.
ELECTIONS FOR TAX YEARS 2018 THROUGH 2022
How do eligible pass-through entities make an election for tax years 2018 through 2022?
The entity is not required to make an election for every tax year (2018 through 2022) in the same year or at all, the election is voluntary. For example, a Form PTET-E may be submitted in 2023 for the 2018 through 2020 tax years and another Form PTET-E may be filed in 2024 for the 2021 and 2022 tax years.
Elections for any one of the tax years 2018 through 2022 must be filed on or before December 30, 2025. Submit the Pass-Through Entity Tax (PTET) Election for Tax Years 2018 through 2022, Form PTET-E via the Nebraska Department of Revenue’s (DOR’s) secure file sharing system.
What forms are required with an election for tax years 2018 through 2022?
A pass-through entity that makes the PTET election for tax years 2018 through 2022 and pays the PTET for the prior tax year during the current tax year will complete the following forms and schedules.
- Pass-Through Entity Tax (PTET) Election for Tax Years 2018 through 2022, Form PTET-E
- Entity Tax Return
- Nebraska Partnership Income Tax Return, Form 1065N; or
- Nebraska S Corporation Income Tax Return, Form 1120-SN
- Schedule K-1N, Form 1065N or Form 1120-SN
Nebraska Schedule PTET - Partner’s Share of Nebraska Pass-Through Entity Tax Form 1065N, Schedule PTET, or Nebraska Schedule PTET – Shareholder’s Share of Nebraska Pass-Through Entity Tax, or Form 1120-SN, Schedule PTET.
Can an entity who did not file a 2018 return because all its income was from Nebraska and all the partners or shareholders were Nebraska resident individuals make the election for tax year 2018?
Yes. A 2018 Nebraska return must be on file for the pass-through entity to make the election. If a 2018 return was not previously filed, the pass-through entity may still file one, then make the election.
The entity makes the PTET election by filing a Pass-Through Entity Tax (PTET) Election for Tax Years 2018 through 2022, Form PTET-E. The Form PTET-E must be filed using the State of Nebraska’s file share system. The 2018 Form 1065N or Form 1120-SN may be filed at the same time as the Form PTET-E but must be mailed to the Nebraska Department of Revenue (DOR). No penalties will be applied to the 2018 return and no explanation is required with the 2018 return.
Should the Form PTET-E be submitted before payments are made for tax years 2018 through 2022?
Yes. The Form PTET-E making an election for tax years 2018 through 2022 must be completed before payment is made. The Form PTET-E should be submitted before or at the same time payment is made.
The PTET may be remitted electronically using Nebraska e-pay, ACH credit, or Nebraska Tele-pay. S corporations may also pay by credit card. Payments made electronically must use the “tax period end date” for the tax year that includes the date the election is made. Partnerships using Nebraska e-pay or Nebraska Tele-pay must use the FTA Tax Type Code 02900 when scheduling its payment. S corporation must use FTA Tax Type Code 02000 or 02100 when scheduling its payment.
Example 1. The electing eligible entity files a calendar-year return and makes the election on October 1, 2023, the tax period end date is December 31, 2023.
Example 2. The electing eligible entity files a fiscal-year return ending September 30 and makes the election on September 15, 2023. The tax period end date is September 30, 2023.
Any eligible entity with a Nebraska e-pay mandate, must remit the PTET due electronically.
ELECTIONS FOR TAX YEARS AFTER 2022
How do eligible pass-through entities make an election for tax years after 2022?
The Pass-Through Entity Tax (PTET) Election for Tax Years After 2022, Form PTET-E must be submitted via the Nebraska Department of Revenue’s (DOR’s) secure file sharing system. The PTET election may also be made when filing the pass-through entity’s return and checking Box 5. The election must be filed on or before the due date of the partnership’s or S corporation’s Nebraska return, including any approved extension.
MAKING THE PTET PAYMENT
UPDATED: 01/31/2024: For tax years after 2022, can the entity make PTET payments before the year end and upload the signed Form PTET-E election closer to the due date of the return?
Yes. The PTET election for tax years after 2022 must be received by the Nebraska Department of Revenue on or before the due date of the return, including any granted extension.
The Pass-Through Entity Tax (PTET) Election for Tax Years After 2022, Form PTET-E must be submitted via the Nebraska Department of Revenue’s (DOR’s) secure file sharing system. The PTET election may also be made when filing the pass-through entity’s return and checking Box 5.
The date the PTET election is filed may make a difference for the timing of the income tax deduction on the federal return.
Is the entity required to make PTET payments electronically?
Only if the partnership or S corporation has previously received an e-pay mandate from the Nebraska Department of Revenue for income taxes. Partnerships and S corporations with an e-pay mandate for income tax must make all their income tax payments electronically.
When our clients are making PTET payments online, what tax type code should they pick?
The following codes may be used to make online PTET payments:
Partnership: 02900
Should entities start making estimated tax payments once the election is made for tax year 2023?
For the 2023 tax year, the pass-through entity may make voluntary estimated tax payments. For tax years beginning on and after January 1, 2024, estimated payments are required for pass-through entities that make the PTET election and have a liability after credits of $400 or more.
Any penalty for underpayment of estimated taxes will be computed separately for the pass-through entity and its owners. The PTET payments made by the pass-through entity will be applied against the entity’s required installments based on when the payment was made. The PTET credit will offset the owner’s total tax liability to determine the required installments.
CALCULATING THE PTET
When a partnership or S corporation has a non-tax paying entity (e.g., IRA, LLC, or S corporation) as an owner and an individual as an owner, how should the PTET be calculated?
The electing partnership or S corporation computes its PTET liability on its entire Nebraska source income.
Are guaranteed payments included in the amount subject to the PTET?
Yes, guaranteed payments are included in the amount subject to the PTET.
LOSSES
If the pass-through entity has a loss in any tax year between 2018 through 2022, can the entity skip that year on the election form.
Yes. The pass-through entity is not required to make the election, it is voluntary. If the pass-through entity makes the election for the “loss” year, enter the Nebraska loss amount in the Nebraska income field and enter zero in the PTET field for the taxable year.
While the election is available, making the election for a loss year may not benefit the partners or shareholders as they may not receive a federal deduction for state taxes or a credit for PTET paid by the partnership or S corporation.
Is there any adjustment in other tax years when a pass-through entity electing to pay the PTET has a “loss” year?
No, the PTET for other tax years cannot be reduced by any amount from a loss year.
CHANGES IN OWNERSHIP/ENTITY
Does the pass-through entity need to be active and operating in tax years 2023, 2024, and 2025 to file the election for tax years 2018 through 2022?
Partnerships and S corporations that no longer exist could make the election. However, there would be no PTET credit for the prior partners or shareholders.
The PTET credit is based on the partner’s distributive share or a shareholder’s pro rata share of the PTET paid. Since the entity no longer exists at the time the payment is made, there is no pro rata or distributive share of the tax paid.
UPDATED: 01/31/2024: For the elections and PTET paid for prior tax years, is the PTET credit allocated to the current owners or based on the ownership of the entity in the tax year for which the election applies?
The PTET credit is available to the individuals or entities that were partners or shareholders for the same tax year the pass-through entity reported the PTET on its Nebraska income tax return.
Is an entity that filed as a partnership until 2020 disqualified from making the PTET election for tax years 2018 to 2022, if it made a federal S corporation election with the IRS in 2020?
An entity that changes from an eligible partnership to an eligible S corporation may make the election in all tax years. Provided the pass-through entity has the same federal identification number, it may make the election for tax years 2018 through 2022 on the same Form PTET-E.
Is an entity that changes from an S corporation to a C corporation disqualified from making the PTET election?
An entity that changes from an S corporation to a C corporation may make the election. However, the shareholders of the C corporation cannot claim the PTET credit because the PTET is paid when the entity is a C corporation, rather than an S corporation.
QUESTIONS RELATED TO PARTNERS OR SHAREHOLDERS PTET CREDIT:
UPDATED: 01/31/2024: When do the owners of the electing pass-through entity claim the PTET credit?
For tax years 2018 through 2022, the PTET credit may be claimed on a return filed for the same tax year the entity reported and paid the related PTET. The PTET must be paid on or before the date the entity files its Nebraska return reporting the PTET.
Example 1: Partnership XYZ makes the PTET election for tax years 2018 through 2022. The related PTET was reported and paid with XYZ’s 2023 Nebraska return. XYZ’s partners may claim their share of the 2018 through 2022 PTET credits on their 2023 Nebraska return.
Example 2. Partnership XYZ makes the PTET election for tax years 2018 through 2022. XYZ reported the 2018 through 2022 PTET on their 2023 return and paid the related PTET before filing its 2023 Nebraska return. XYZ’s partners may claim their share of the 2018 through 2022 PTET credits on their 2023 Nebraska return.
For tax years after 2022, the PTET credit may be claimed on a return filed for the same tax year the entity reported the related PTET. The entity must pay the PTET, before the related credit will be allowed to its partners or shareholders.
Example 3: Partnership ABC made a PTET election for the 2023 tax year. The related PTET was reported and paid with ABC’s 2023 Nebraska return. ABC’s partners may claim their share of the 2023 PTET credit on their 2023 Nebraska return.
The above examples assume the partnerships and their partners have the same tax year.
Can estates or trusts that receive a PTET credit distribute the credit to its beneficiaries?
The estate or trust may claim the PTET credit on any income retained by the estate or trust and distribute the remaining PTET credit to its beneficiaries in the same manner as income is distributed. The distribution to the beneficiaries will be shown on the Schedules K-1N.
If the estate or trust does not distribute any income, the estate or trust would claim all the PTET credit.
How is the fiduciary return completed to show a portion of the PTET credit will be retained by the estate or trust and the remaining PTET credit will be distributed to the beneficiaries?
Only the PTET credit amount retained by the estate or trust is reported on Form 1041N, line 26 and applied towards the total Nebraska income tax liability reported on the return. Any PTET credit retained by the estate or trust greater than the total Nebraska income tax liability would be an overpayment to the estate or trust.
If none of the PTET credit is retained by the estate or trust, only complete 26a, 26b, and 26c on the Form 1041N. Do not enter an amount on Form 1041N, line 26.
The PTET credit amount distributed to the beneficiaries is reported on the Form 1041N, Schedules K-1N. Attach a schedule indicating the amount being reported to each beneficiary on the Schedules K-1N.
If PTET credits were received from more than one partnership attach a schedule in the same format as lines 26a, 26b, and 26c. If redistributing and retaining credits list the amounts retained by the trust by tax year on the attachment.
Can a non-electing partnership that received credits from an electing lower-tier partnership distribute the PTET credits to its partners?
The PTET credit received from a lower-tier partnership can be claimed by the non-electing partnership or it can be redistributed to the non-electing entity’s partners.
How does a non-electing partnership complete its partnership return to distribute the PTET credit received from a lower-tier partnership to its partners?
Complete lines 23a, 23b, and 23c of Form 1065N and attach the Schedule(s) K-1N. If the non-electing partnership received PTET credits from more than one partnership, attach a schedule in the same format as lines 23a, 23b, and 23c. If redistributing and retaining credits list the amounts retained by the partnership by tax year on the attachment.
If none of the PTET credit is retained by the non-electing partnership, do not enter an amount on line 23 of Form 1065N. Include the PTET credits distributed to the partners on the Schedule PTET and the partners’ Schedule K-1N.
If claiming a portion of the PTET credit, include the amount claimed by the partnership on line 23 of Form 1065N. Do not include on line 23 the amount of PTET credits distributed to the partners. Include the amount of PTET credits distributed to the partners on the Schedule PTET and the partners’ Schedule K-1N.
How does an S corporation distribute PTET credits received from a partnership to its shareholders?
Complete lines 23a, 23b, and 23c of Form 1120-SN and attach the Schedule(s) K-1N. If the S corporation received PTET credits from more than one partnership, attach a schedule in the same format as lines 23a, 23b, and 23c. If redistributing and retaining credits list the amounts retained by the S corporation by tax year on the attachment.
If none of the PTET credit is retained by the S corporation, do not enter an amount on line 23 of Form 1120-SN. Include the PTET credits distributed to the shareholders on the Schedule PTET and the shareholders' Schedule K-1N.
If claiming a portion of the PTET credit, include the amount claimed by the S corporation on line 23 of Form 1120-SN. Do not include on line 23 the amount of PTET credits distributed to the shareholders. Include the amount of PTET credits distributed to the shareholders on the Schedule PTET and the shareholders’ Schedule K-1N.
Will a resident grantor trust that receives a PTET credit be disregarded and the credit for taxes paid by the entity pass through to the grantor?
Yes, the PTET credit will flow through directly to a resident grantor.
Are Forms 12-N required for nonresident partners or shareholders of an electing pass-through entity?
No. Forms 12-N will not be required if the partnership or S corporation makes the PTET election.
Will a partnership electing to pay the PTET be able to specially allocate the PTET to the partners?
Yes, Nebraska would accept the proposed allocation, provided it is allowable under the federal income tax laws. The PTET credit for partners is equal to the partner’s pro rata or distributive share of the PTET paid by the partnership. The pro rata or distributive share is determined under the Internal Revenue Code and related Treasury Regulations.
Can a tax-exempt partner or shareholder, that does not file federal or Nebraska returns, claim the PTET credit?
Yes. For example:
- A private foundation that is organized as a nonprofit corporation, should file a Nebraska Corporation Income Tax Return, Form 1120N, to claim its share of the PTET credit. Please attach a copy of the first page of the Federal Form 990-PF and include a statement indicating why the Form 1120N is being filed.
An ESOP may claim its share of the PTET paid by filing a Nebraska Fiduciary Income Tax Return, Form 1041N, claiming the credit. Please include a statement with Form 1041N indicating why it is being filed.
Will an individual’s return claiming the PTET credit delay their refund?
No. The Nebraska Department of Revenue is not anticipating a delay in processing Forms 1040N claiming a PTET credit, provided the Nebraska Schedules K-1N supporting the credit are attached to the return and the entity that paid the PTET properly filed the Nebraska Schedule PTET.
WITHHOLDING/ESTIMATED PAYMENT TREATMENT & PTET CREDIT
For individual underpayment penalty purposes, will the PTET credit be counted as a payment towards the liability like withholding or estimated payments?
No. The PTET is part of the total refundable credits, rather than withholding.
UPDATED: 01/31/2024: For tax years before 2023, are individual nonresident partners or shareholders with Nebraska withholding required to file amended or original Nebraska nonresident returns to receive refunds from the withholding and PTET credits?
No. For tax years before 2023, the individual partners or shareholders will generally claim the withholding and PTET credits on returns filed in different tax years. The withholding credit is claimed on the return filed for the tax year for which the withholding was reported by the entity. The PTET credit is claimed on the return filed for the tax year in which the entity reported the PTET on its Nebraska return.
FORM 1099-G AND FEDERAL LAW QUESTIONS
How will the Nebraska Department of Revenue issue Forms 1099-G for taxpayers claiming the PTET credit?
The Nebraska Department of Revenue (DOR) issues Form 1099-G if a taxpayer itemized deductions on their Nebraska income tax return, and the return calculated an overpayment.
For PTET credits claimed that relate to tax years 2018 through 2022, the Nebraska Department of Revenue will issue separate Forms 1099-G related to each tax year (2018 through 2022).
The taxation of state income tax refunds is controlled by the IRC and related Treasury Regulations. Please review IRS Notice 2023-56 and the various laws it references or contact the IRS regarding the taxation of income tax refunds resulting from the pass-through entity tax credit.
Is the PTET tied to the federal $10,000 sales and local tax (SALT) limitation, and if the federal SALT limit goes away, does the Nebraska PTET expire as well?
No, the Nebraska PTET law is not tied to the federal SALT limitation. The PTET election will be available even if the federal $10,000 SALT limitation goes away.
GENERAL FILING QUESTIONS:
Do I need to attach a Power of Attorney, Form 33 to upload PTET election forms if I am the tax preparer?
No. You do not need to attach a Form 33 to upload a Form PTET-E. A Form 33 is only necessary if you are signing the Form PTET-E on behalf of your client.
Will DOR accept a digital signature from the owners of the electing pass-through entity on the PTET election, or is a “wet” signature required?
Digital signatures are acceptable on the PTET election forms. See Revenue Ruling 99-20-1, Signature Requirements for additional information.
Are all election forms filed using DOR’s secure file sharing system?
Yes, all election forms (Forms PTET-E) must be filed using DOR’s secure file sharing system. For tax years after 2022, eligible pass-through entities may make the election on the return by checking Box 5.
Further Questions?
Contact Nebraska Taxpayer Assistance
at 800-742-7474 (NE & IA) or 402-471-5729
