SALT Cap Giving You Heartburn? Try Nebraska’s PTET

SALT Cap Giving You Heartburn? Try Nebraska’s PTET

In this week’s Tuesday Tax Take, we’re taking a slight break from the One Big Beautiful Bill Act (the “OBBBA”) to highlight a new Nebraska law that offers meaningful state-level relief for business owners navigating federal tax limits.

In response to the federal cap on the State and Local Tax (SALT) deduction under the Tax Cuts and Jobs Act of 2017, Nebraska enacted the Pass-Through Entity Tax (PTET) in 2023. The PTET allows pass-through entities such as S corporations, partnerships, and limited liability companies to elect to pay Nebraska income tax at the entity level rather than passing the obligation through to individual owners.

This election has important federal consequences. When Nebraska income tax is paid by the entity, the full amount is generally deductible for federal tax purposes as a business expense. This avoids the SALT deduction cap that would otherwise limit the taxpayer’s itemized deduction if the tax were paid at the individual level. The cap has changed more than once in recent years, most recently under the OBBBA (was $10,000, now is $40,000), but remains a significant limitation for many business owners. Taxpayers who make the PTET election receive a refundable Nebraska income tax credit equal to the amount of tax paid by the entity. The income still flows through and appears on the individual’s Nebraska return, but the credit offsets the resulting liability.

LB647, signed into law on June 4, 2025, simplifies the process for making the PTET election and clarifies when credits may be claimed. For tax years beginning on or after January 1, 2023, qualifying pass-through entities may make the election directly on the applicable Nebraska income tax return on or before its due date, including any valid extensions. A separate election form is no longer required.

The law also provides more flexibility in timing the Nebraska tax credit for individual partners or shareholders. For returns filed for tax years beginning on or after January 1, 2022, the PTET credit may be claimed on the taxpayer’s personal return for the same tax year in which the election is made, even if the actual Nebraska tax payment is made in a later year. This rule applies regardless of when the payment is deducted for federal purposes, which continues to follow federal timing rules.

Nebraska’s PTET, as refined by LB647, offers a practical and tax-efficient option for owners of pass-through entities looking to maximize their federal deductions and streamline state tax compliance. With simplified elections and more flexible credit timing, the updated PTET framework is well worth considering as part of your year-end or long-term tax strategy.

This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.