State and local tax advisor: June 2023

The states covered in this issue of our monthly tax advisor include:

• Colorado
• Connecticut
• Hawaii
• Illinois
• Minnesota
• Montana
• Nebraska
• Oklahoma
• Oregon
• Virginia
• West Virginia

Colorado

Corporate, personal income taxes: Corporate return deadline, other reporting and payment provisions changed

Colorado has enacted legislation that:

• Changes the due date for income tax returns for C corporations.
• Adopts the Multistate Tax Commission’s model statute for reporting adjustments to federal taxable income.
• Consolidates composite return and withholding options for ensuring that income taxes owed by nonresident owners of pass-through entities will be paid and clarifies the calculation of the required payment.

Corporate return deadline

For tax years beginning on or after Jan. 1, 2024, the due date for C corporation returns will be the 15th day of the fifth month following the close of the tax year (May 15 for calendar year taxpayers), instead of the 15th day of the fourth month following the close of the tax year (April 15 for calendar year taxpayers). This will also move the extension deadline.

Reporting adjustments to federal taxable income

The legislation replaces the existing Colorado statute regarding the reporting of adjustments to federal taxable income with a model statute developed by the Multistate Tax Commission. The model statute allows more time to report the adjustments and allows pass-through entities to handle adjustments at the entity level on behalf of their owners. The changes apply to federal adjustments with a final determination date on and after Jan. 1, 2024.

Composite return and withholding options

Under current law, partnerships and S corporations (pass-through entities) have three options for ensuring that the income taxes owed by nonresident owners will be paid. They may file a composite return on behalf of the nonresident owners, withhold an estimated tax payment, or collect and file an agreement that each such owner will file a separate return. For tax years beginning on and after Jan. 1, 2024, the legislation consolidates the composite return and withholding options and clarifies the calculation of the required payment.

Effective date

These provisions take effect 90 days after final adjournment of the General Assembly, unless a referendum petition is filed. If a referendum petition is filed, then the referred provisions will not take effect unless approved by voters at the November 2024 general election. If approved, the provisions will take effect on the date of the official declaration of the vote thereon.

Ch. 290 (H.B. 1277), Laws 2023, effective as noted.

Corporate, personal income taxes: Addition required for business meals; credit provided to improve food accessibility

Colorado has enacted legislation that:

• Requires an addition to taxable income in an amount equal to the federal deduction for business meals.
• Provides a new income tax credit to small food retailers, small family farms, and members of a community food consortium.

Addition to tax for business meals

For the 2024 through 2030 income tax years, individual and corporate taxpayers must add to federal taxable income, in computing their Colorado income tax liability, an amount equal to their federal deduction under IRC Sec. 274(k) for business meals.

Credit to improve food accessibility

Also, for the 2024-through-2030 income tax years, Colorado provides a refundable tax credit to:

• Small food retailers and small family farms that purchase small food business recovery and resilience grant program equipment.
• Members of the food consortium for small food retailers and Colorado-owned and Colorado-operated farms that complete their duties and responsibilities.

For small food retailers and small family farms, the credit equals a percentage of the purchase price of the small food business recovery and resilience grant program equipment, minus any grant awarded for the equipment. For members of the consortium, the credit equals a percentage of the amount spent on completing a member’s duties and responsibilities, minus any amount awarded for the completion of those duties and responsibilities. The credit percentages are:

• 85% for 2024.
• 75% for 2025 through 2030.

Applications for the credit must be submitted to the Department of Agriculture. The Department cannot issue tax credit certificates that exceed a total of $10 million for any income year.

Effective date

These provisions take effect 90 days after final adjournment of the General Assembly, unless a referendum petition is filed. If a referendum petition is filed, then the referred provisions will not take effect unless approved by voters at the November 2024 general election. If approved, the provisions will take effect on the date of the official declaration of the vote thereon.

H.B. 1008, Laws 2023, effective as noted.

Connecticut

Corporate, personal income taxes: Surcharge extended, rates lowered, PTE tax changes enacted

Connecticut enacted budget legislation that:

• Extends the 10% corporation business tax surcharge to the 2023, 2024, and 2025 tax years, effective retroactively to Jan. 1, 2023.
• Exempts corporation business taxpayers from any estimated tax underpayment penalty resulting from the surcharge extension for the period between Jan. 1, 2023 and the effective date of the legislation.
• Modifies the pass-through entity (PTE) tax, including a change that makes the tax optional instead of mandatory.
• Restores mandatory PTE composite returns and payments for nonresident owners, effective beginning with the 2024 tax year.
• Lowers the personal income tax rates for the bottom two rate brackets.

Pass-through entity tax

Effective for tax years beginning on or after Jan. 1, 2024, PTEs can elect to pay tax at the entity level on each owner’s distributive share of income from state sources. The election applies to:

• S corporations 
• Partnerships 
• Limited liability companies (LLCs) treated as a partnership for federal income tax purposes.

The deadline for the annual election is the original or extended due date for the PTE’s annual Connecticut return.

A PTE can no longer compute the tax using the taxable income base method. All electing PTEs must compute the tax at a rate of 6.99% using the alternative base method, which is the sum of:

• The PTE’s modified Connecticut source income that directly or indirectly flows through to resident or nonresident owners.
• The PTE’s modified federal net income that is not sourced to any state with taxable nexus and that flows through to resident owners.

Other changes to the tax include:

• Repealing the return filing exemption for nonresident owners when the PTE is the only source Connecticut income for the owner or owner’s spouse and the credit for PTE tax paid satisfies the owner’s state income tax liability.
• Eliminating the corporation business credit for PTE tax paid.
• Ending the combined reporting option for one or more commonly owned PTEs.

Personal income tax rates

Effective for tax years beginning with the 2024 tax year, Connecticut is reducing the personal income tax rate from 3% to 2% on taxable income of up to:

• $10,000 for taxpayers with a filing status of single or married filing separately.
• $16,000 for taxpayers with a filing status of head of household.
• $20,000 for taxpayers with a filing status of married filing jointly or surviving spouse.

The rate decreases from 5% to 4.5% on taxable income of:

• $10,001 to $50,000 for taxpayers with a filing status of single or married filing separately.
• $16,001 to $80,000 for taxpayers with a filing status of head of household.
• $20,001 to $100,000 for taxpayers with a filing status of married filing jointly or surviving spouse.

Connecticut reduces or phases out the 2% rate by:

• $1,000 for each $5,000 by which the Connecticut adjusted gross income (AGI) of single filers exceeds $56,500.
• $1,000 for each $2,500 by which the Connecticut AGI of married taxpayers filing separately exceeds $50,250.
• $1,600 for each $4,000 by which the Connecticut AGI of head of household filers exceeds $78,500.
• $2,000 for each $5,000 by which the Connecticut AGI of married taxpayers filing jointly or surviving spouses exceeds $100,500.

Tax benefit recapture requirements under current law continue to apply to taxpayers with AGI that exceeds specified thresholds. The recapture eliminates the benefit certain higher income taxpayers receive from having part of their income taxed at lower rates.

Connecticut added a new recapture threshold and amount that equals:

• $25 for each $5,000 by which the Connecticut AGI of single filers and married taxpayers filing separately exceeds $105,000, up to a maximum of $250.
• $40 for each $8,000 by which the Connecticut AGI of head of household filers exceeds $168,000, up to a maximum of $400.
• $50 for each $10,000 by which the Connecticut AGI of married taxpayers filing jointly or surviving spouses exceeds $210,000, up to a maximum of $500.

H.B. 6941, Laws 2023, effective June 12, 2023, and as noted; Press Release, Office of Connecticut Gov. Ned Lamont, June 12, 2023.

Hawaii

Corporate, personal income taxes: Elective pass-through entity tax enacted

Hawaii has enacted an elective pass-through entity income tax. It applies beginning with the 2023 tax year.

Which entities may make the election?

Partnerships and S corporations may make the election to pay tax at the entity level. This includes limited liability companies treated as partnerships for federal income tax purposes, but not publicly traded partnerships.

How and when do entities make the election?

Entities making the election must make a separate election for each tax year, in the form and manner prescribed by the Director of Taxation. The election must be signed by each member of the entity, or by an officer, manager, or member authorized to make the election.

Once made for a tax year, the election is irrevocable.

What is the tax rate?

The tax rate is the same as the highest individual income tax rate. It applies to the sum of all non-corporate members’ distributive shares and guaranteed payments of Hawaii taxable income.

Do nonresident members of an electing entity need to file Hawaii returns?

Nonresident members of an electing entity do not need to file Hawaii returns if their only source of income is from the electing entity and the entity files and pays the PTE tax due.

Are members of an electing entity allowed a credit for the PTE tax paid?

Members of an electing entity whose distributive shares and guaranteed payments are subject to the PTE tax may claim a nonrefundable credit for their share of the tax paid.

Also, residents and part-year residents may claim a nonrefundable credit for their share of similar taxes paid to another state on the income of any partnership or S corporation of which they are members.

Act. 50 (S.B. 1437), Laws 2023, effective Jan. 1, 2024, and applicable as noted.

Illinois

Corporate, personal income taxes: Withholding requirement for investment partnerships enacted

Effective for tax years ending on or after Dec. 31, 2023, investment partnerships must withhold Illinois income and replacement tax for nonresident partners based on:

• The partner’s share of distributable income from sources in the state.
• The applicable tax rate for corporations, estates and trusts, and individuals.

The individual income tax rate applies to nonresident partners that are partnerships or S corporations.

What is an investment partnership?

A partnership is an investment partnership in Illinois if:

• 90% or more of its assets consist of qualifying investment securities, bank or financial deposits, and office and equipment necessary to carry on its activities.
• 90% or more of its gross income is from interest, dividends, gains from the sale or exchange of investment securities.

Effective for tax years ending on or after Dec. 31, 2023, the gross income threshold also includes the distributive share of partnership income from lower-tier partnership interests meeting the definition of qualifying investment security. A qualifying investment security includes a partnership interest that, in the hands of the partnership, qualifies as a security under federal law.

Are there exemptions?

There are no exemptions from the withholding requirement. The nonresident partners cannot claim a credit for withholding tax paid unless the distributable income is from a lower-tier partnership interest.

P.A. 103-9 (S.B. 1963), Laws 2023, effective June 7, 2023, and as noted.

Corporate, personal income taxes: PTE tax deduction added for retired partner distributions

Illinois added a deduction for pass-through entities, including S corporations and partnerships, that elect to pay Illinois income tax at the entity-level. Electing pass-through entities can deduct distributions to retired partners if the payments qualify for exclusion from self-employment income under IRC Sec. 1402. The new deduction is effective tax years ending on or after Dec. 31, 2023.

103-9 (S.B. 1963), Laws 2023, effective June 7, 2023, and as noted.

Minnesota

Multiple taxes: Omnibus tax legislation includes one-time rebates, social security tax cuts, and more

Minnesota has enacted omnibus tax legislation that provides one-time income tax rebates to eligible individuals and makes numerous other income tax changes, as highlighted below.

Sales and use, property, and other tax changes in the legislation will be reported separately.

One-time rebates

As previously reported, the Department of Revenue will distribute one-time direct tax rebate payments to eligible individuals for tax year 2021.

Social Security subtraction

Beginning with the 2023 tax year, taxpayers may subtract the full amount of their taxable Social Security benefits in determining Minnesota taxable income if their adjusted gross income (AGI) does not exceed:

• $100,000 for married taxpayers filing joint returns and surviving spouses.
• $78,000 for single and head of household taxpayers.
• $50,000 for a married taxpayer filing a separate return.

The subtraction will be reduced by 10% for each $4,000 of AGI (10% for each $2,000 of AGI for a married taxpayer filing a separate return), or fraction thereof, in excess of the applicable phaseout threshold noted above.

After 2023, the phaseout threshold amounts are subject to adjustment for inflation.

Taxpayers may, as an alternative, subtract taxable Social Security benefits using the state’s pre-2023 approach if it results in a greater subtraction amount. The alternate subtraction equals the lesser of taxable Social Security benefits or the following maximum amounts:

• $5,840, reduced by 20% of provisional income over $88,630, for married taxpayers filing joint returns and surviving spouses.
• $4,560, reduced by 20% of provisional income over $69,250, for single and head of household taxpayers.
• $2,920, reduced by 20% of provisional income over $44,315, for a married taxpayer filing a separate return.

"Provisional income" for this purpose is modified AGI plus one half of the taxable Social Security benefits received during the tax year.

Public pension subtraction

Beginning with the 2023 tax year, taxpayers may subtract some public pension benefits from their taxable income. The subtraction applies to certain state and federal pension plan benefits earned based on service for which the recipient does not also receive Social Security benefits.

Taxpayers may subtract up to:

• $25,000 for married taxpayers filing joint returns and surviving spouses.
• $12,500 for all other filers.

The subtraction will be reduced by 10% for each $2,000 of AGI, or fraction thereof, in excess of:

• $100,000 for married taxpayers filing joint returns and surviving spouses. 
• $78,000 for single and head of household taxpayers. 
• $50,000 for a married taxpayer filing a separate return.

After 2023, the subtraction limits and phaseout thresholds are subject to adjustment for inflation.

Unemployment compensation subtraction

Taxpayers may also subtract from taxable income any unemployment compensation received in tax years beginning after Dec. 31, 2020, and before Jan. 1, 2022, as a result of the decision in In re Muse, Minnesota Court of Appeals, 956 N.W. 2d 1 (2021).

Discharged student loans exclusion

Minnesota permanently adopts the American Rescue Plan Act exclusion from income for discharged student loans. A discharge that occurs after Dec. 31, 2025, but otherwise qualifies for the federal exclusion, may be subtracted for Minnesota tax purposes.

Sexual harassment or abuse damages subtraction

Beginning with the 2023 tax year, taxpayers may subtract damages received under a sexual harassment or abuse claim that are not deductible under federal law. This applies to damages not deductible federally because they are not received on account of personal physical injuries or physical sickness.

Itemized and standard deduction limitations

For tax year 2023, a taxpayer’s itemized deductions or standard deduction will be reduced if the taxpayer’s AGI exceeds $220,650. Except as noted below, they will be reduced by the lesser of: 

• 3% of the taxpayer’s AGI in excess of $220,650 but not over $304,970, plus 10% of the taxpayer’s AGI in excess of $304,970 (previously, simply 3% of the taxpayer’s AGI in excess of $220,650). 
• 80% of the amount of the taxpayer’s itemized deductions or regular standard deduction.

Notwithstanding the above provisions, if a taxpayer has AGI over $1 million, the taxpayer’s itemized deductions or standard deduction will simply be reduced by 80%.

For a married taxpayer filing a separate return, the AGI amounts must be halved.

After 2023, the AGI amounts are subject to adjustment for inflation.

Net investment income tax

For tax years beginning after 2023, Minnesota imposes a new tax on the net investment income of individuals, estates, and trusts. The tax is imposed at the rate of 1% of net investment income in excess of $1 million. It is in addition to the regular income taxes imposed on individuals, estates, and trusts.

For an individual who is not a full-year resident or for an estate or trust, the tax must be computed by multiplying net investment income by a fraction in which: 

• The numerator is the net investment income allocable to Minnesota. 
• The denominator is the total net investment income.

Global intangible low-taxed income (GILTI)

Beginning with the 2023 tax year, any amounts included in taxable income pursuant to IRC Sec. 951A (global intangible low-taxed income) are dividend income for Minnesota tax purposes. Also, the amount of income deducted under IRC Sec. 250 must be added back.

Net operating losses

A corporation’s maximum net operating loss deduction decreases from 80% to 70% of taxable net income beginning with the 2023 tax year.

Dividends received deduction

The corporate deduction for dividends received from another corporation also decreases beginning with the 2023 tax year. The deduction decreases:

• From 80% to 50% of dividends received from corporations in which the recipient owns 20% or more of the stock. 
• From 70% to 40% of dividends received from corporations in which the recipient owns less than 20% of the stock.

Excess business loss subtraction

The excess business loss subtraction enacted in Ch. 1 (H.F. 31), Laws 2023, has been repealed.

IRC conformity

Minnesota has updated its general Internal Revenue Code conformity date to May 1, 2023 (previously, Dec. 15, 2022). Retroactive federal changes are effective for Minnesota purposes at the same time they are effective for federal purposes.

Pass-through entity tax

When calculating the Minnesota PTE tax, the income of a resident qualifying owner is not subject to allocation outside of Minnesota for tax year 2023 and after.

Also, beginning with the 2023 tax year, Minnesota allows a credit against the tax for PTE tax paid to another state. The qualifying owners of the entity may claim the credit.

The PTE tax provisions will expire at the same time as IRC Sec. 164(b)(6)(B) (state and local tax deduction limitation).

Reporting and payment requirements for audited partnerships

Effective retroactively beginning with the 2021 tax year, a partnership subject to a federal partnership level audit must within 90 days after the final federal determination date:

• File an amended PTE tax report for all direct partners who were included in a PTE tax return in the reviewed year.
• Pay the additional amount that would have been due had the adjustments been reported properly.

Working family and child tax credits

Beginning with the 2023 tax year, Minnesota has restructured the working family credit to work in conjunction with a new refundable child tax credit.

The maximum child tax credit equals $1,750 per qualifying child. For purposes of the credit, “qualifying child” has the meaning in IRC Sec. 32(c) (earned income credit), except with respect to: 

• Individuals who attain age 18 or greater in the tax year.
• IRC Sec. 32(m) (identification numbers).

The working family credit equals 4% of the first $8,750 of earned income, increased by:

• $925 for a taxpayer with one qualifying older child.
• $2,100 for a taxpayer with two qualifying older children.
• $2,500 for a taxpayer with three or more qualifying older children.

"Qualifying older child" means a qualifying child as defined in IRC Sec. 32(c) (earned income credit) that has attained at least age 18 in the tax year. For purposes of determining whether a child is a qualifying older child, IRC Sec. 32(m) (identification numbers) does not apply.

The two credits are phased down jointly, with the combined amount of credits reduced when earned income or AGI, whichever is greater, exceeds:

• $35,000 for joint filers.
• $29,500 for all other filers.

For part-year residents, the combined amount of credits must be allocated based on their Minnesota residency percentage.

The credit amounts, eligible earned income, and phaseout thresholds are subject to adjustment for inflation.

The Commissioner of Revenue may, but is not required to, establish a process for advance payment of the child tax credit.

Dependent care credit

Beginning with the 2023 tax year, Minnesota will allow an unmarried taxpayer with a newborn child who does not have dependent care expenses to claim the "newborn credit." Previously, only married taxpayers could claim this credit.

Education credit

Beginning with the 2023 tax year, Minnesota modifies the education credit to: 

• Increase the maximum credit from $1,000 to $1,500 per qualifying child. 
• Change the phaseout threshold to $70,000 of AGI (previously, $33,500 of household income).
• Clarify the instructional fees and expenses that qualify for the credit.

Renter’s credit 

For tax years beginning after 2023, Minnesota converts the renter’s property tax refund to a refundable income tax credit. Rather than filing for a refund on a separate form, a renter will claim the credit on an income tax return. The amount of the credit allowed is based on the taxpayer’s household income and rent constituting property taxes paid. The Commission of Revenue must annually adjust the income thresholds and maximum credit amounts for inflation.

Beginning farmer and agricultural asset owner credits 

The income tax credits for beginning farmers and agricultural asset owners who sell or rent their assets to beginning farmers have been amended to:

• Extend the sunset date for the credits to taxable years beginning after Dec. 31, 2030 (previously, Dec. 31, 2023). 
• Increase the credit for the sale of agricultural assets to 8% (previously, 5%) or 12% for a sale to an emerging farmer, of the lesser of the sale price or the fair market value of the assets, up to a maximum of $50,000 (previously, $32,000), for tax years beginning after 2022. 
• For sales of land, allow a sale to a family member to qualify for a credit for tax years beginning after 2022. 
• Increase the total amount of agricultural asset owner credits that may be allocated to $6.5 million for tax year 2023 and decrease the amount to $4 million for tax years beginning after 2023. 
• Give some priority for newly allocated credits to emerging farmers for tax years beginning after 2022.

Small business investment credit

The sunset date for the small business investment credit has been extended to taxable years beginning after Dec. 31, 2024 (previously, Dec. 31, 2022).

Film production credit 

The film production credit has been amended to: 

• Extend the sunset date for the credit to Jan. 1, 2031, for tax years beginning after Dec. 31, 2030 (previously, Jan. 1, 2025, for tax years beginning after Dec. 31, 2024). 
• For tax years beginning after 2022, modify the definition of a film "project" to allow the $1 million expenditure threshold to be met with eligible expenditures in any consecutive 12-month period beginning after the expenditures are first paid in Minnesota (previously, in the taxable year). 
• Increase the cap on the aggregate amount of credits that may be allocated to $24,950,000 per year, effective for allocation certificates issued after 2022 (previously, $4,950,000 per year). 

Historic structure rehabilitation credit

The historic structure rehabilitation credit will now expire after fiscal year 2030 (previously, fiscal year 2022). Also, projects that have started rehabilitation work after June 30, 2022, and before July 1, 2023, that otherwise meet the requirements for the credit may be eligible for the credit if an application for the credit is received by Aug. 30, 2023.

Manufactured home sales credit

For tax year 2023 and after, Minnesota provides an income tax credit to taxpayers that sell a manufactured home park to a manufactured home park cooperative. The credit equals 5% of the amount of the sale. The credit is not refundable. Excess credit may be carried forward to the five succeeding tax years. The credit provisions will expire on Jan. 1, 2031, for tax years beginning after Dec. 31, 2030.

Short line railroad infrastructure modernization credit

For tax years 2023 through 2030, a Class II or Class III railroad may claim a Minnesota income tax or insurance premiums tax credit for a percentage of its qualified railroad reconstruction or replacement expenditures. The credit equals 50% of eligible expenses, not to exceed $3,000 per mile, multiplied by the number of miles of track owned or leased in the state for which the taxpayer made qualified expenditures for the year. If the amount of credit determined for any tax year exceeds the tax liability for that year, the excess may be carried forward to five succeeding tax years. The credit is transferable.

Ch. 64 (H.F. 1938), Laws 2023, effective as noted. 

Montana

Corporate, personal income taxes: Optional pass-through entity tax discussed 

Montana has issued guidance on the recently enacted pass-through entity tax (PTET), which is an elective tax paid by the pass-through entity on an owner’s distributive share of Montana source income. The tax is imposed at the highest marginal individual income tax rate (6.75% for 2023). 

Annual election. The annual election is available beginning with tax year 2023 and is made by the entity on its timely filed Form PTE. The election applies to the distributive share of Montana source income allocable to all owners that are individuals, estates, trusts, and pass-through entities. The election is irrevocable and cannot be made after the extended due date of the return. The distributive share of Montana source income allocable to C corporations and tax-exempt entities is not subject to the PTET. Pass-through entities that are not doing business in Montana but that have Montana resident owners can also file a Form PTE and elect to pay the PTET. 

Refundable credit. For owners, the law creates a corresponding refundable credit for their share of the tax paid by the entity. 

Nonresident owners. For nonresident owners of an electing entity, the pass-through entity tax takes the place of the existing withholding system and composite tax requirements. 

Calculation of tax. The PTET is calculated based on each owner’s distributive share of income apportioned or allocated to Montana at the highest individual marginal income tax rate. However, the entity can choose to make an election to allow Montana resident owners to be assessed on their entire distributive share of income, regardless of apportionment and allocation rules. 

Estimated payments. Electing pass-through entities are required to make quarterly estimated tax payments. For tax year 2023, payments are due June 15, 2023, Sept. 15, 2023, and Jan. 16, 2024, and may be made in equal installments of thirds. If an electing entity previously made an estimated payment, the payment will automatically be applied toward the entity’s PTET liability. The department advises that it will not transfer estimated tax payments between the account of an owner and the account of a pass-through entity; to avoid paying estimated taxes at both the entity level and the owner level, owners of an electing pass-through entity must adjust their own estimated tax payments. 

The guidance also addresses penalties and interest. 

S.B. 554, Laws 2023, applicable as noted; Tax News You Can Use, Montana Department of Revenue, June 9, 2023. 

Nebraska

Corporate, personal income taxes: Elective PTE tax enacted, partnership audit reporting rules modified 

Nebraska enacted legislation that establishes an elective pass-through entity (PTE) income tax for:

• S corporations 
• Partnerships, including tiered partnerships 
• Limited liability companies (LLCs) 

The elective tax applies retroactively to tax years beginning on or after Jan. 1, 2018. It does not apply to publicly traded partnerships. 

The legislation also modified how partnerships can report Nebraska income tax, penalties, or interest connected with audit adjustments by the IRS or another state.

Election 

The deadline for making the election is: 

• Dec. 31, 2025, for tax years beginning on or after Jan. 1, 2018, and before 2023. 
• Effective beginning with the 2023 tax year, the original or extended due date of the S corporation’s, partnership’s, or LLC’s Nebraska return.

The deadline for credit or refund claims resulting from an election for tax years before 2023 is the later of:

• The expiration of the Nebraska limitations period for filing income tax credit or refund claims. 
• Jan. 31, 2026.

Rate and computation of tax 

An electing partnership, S corporation, or LLC must pay the tax at the highest marginal personal income tax rate multiplied by its net income from Nebraska sources. There is an addback requirement for the amount of any Nebraska income tax deducted by the partnership, S corporation, or LLC on its federal return. Nebraska does not allow any carryforward for resulting net operating losses (NOLs).

Estimated tax 

Nebraska estimated tax requirements for corporate income taxpayers apply to electing S corporations, partnerships, and LLCs. The estimated tax requirements take effect beginning with the 2024 tax year.

Credits

Shareholders, partners, or members can claim a refundable credit for income tax paid by the electing S corporation, partnership, or LLC. The credit is equal to the shareholder’s, partner’s, or member’s distributive share of the income tax paid.

If the electing partnership is a partner of another electing partnership, the upper tier electing partnership can claim a credit for the tax paid by the lower tier electing partnership. The upper tier electing partnership must distribute the share of its partners’ credits for the taxes paid by all tiers of electing partnerships.

If an electing S corporation, partnership, or LLC pays a similar pass-through entity tax to another state, shareholders, partners, or members who are Nebraska residents can claim a credit for the tax paid.

Nonresident shareholders, partners, or members 

Nonresident shareholders, partners, or members do not need to file a Nebraska income tax return if: 

• The nonresident’s only source of income from the state is from an electing S corporation, partnership, or LLC. 
• The nonresident’s credit for income tax paid by the electing S corporation, partnership, or LLC satisfies their state income tax liability.

Audit adjustment reporting

Partnerships must report audit adjustments on an amended Nebraska return within 60 days after:

• The final determination of a federal change or the filing of an amended federal return. 
• The final determination of a change by another state or the filing of an amended return with that state.

Under the legislation, a partnership can elect to pay all Nebraska income tax, penalties, or interest with the amended return at the highest marginal personal income tax rate as if the partnership were an individual. If the election is made, the partners do not have to:

• File amended Nebraska returns for the year of the election. 
• Pay Nebraska income tax, penalties, or interest resulting from the partnership’s amended return.

The election does not change the partners’ basis, or other tax items, related to their interests in the partnership.

L.B. 754, Laws 2023, effective May 31, 2023, and as noted.

Oklahoma

Corporate income, franchise taxes: Franchise tax expiration set

Oklahoma has enacted legislation that ends the franchise tax with tax year 2023. The law also removes the requirement for an annual statement after tax year 2023.

H.B. 1039, Laws 2023, effective July 1, 2023. 

Corporate, personal income taxes: Bonus depreciation clarified

Oklahoma has clarified the use of bonus depreciation by income taxpayers. If a taxpayer elects immediate and full expensing of qualified property or qualified improvement property, any depreciation calculated and claimed cannot be a duplication of any depreciation or bonus depreciation allowed or permitted on the federal tax return.

How will depreciation be determined after 2022?

For income tax returns filed on or after Jan. 1, 2023, federal taxable income will be increased by the amount of depreciation received under the IRC for the property the taxpayer has chosen to immediately and fully expense on the Oklahoma income tax return.

How will returns already filed be corrected?

Before Oct. 1, 2023, if a taxpayer filed a return on which federal taxable income was not increased as required above, the taxpayer must file an amended return reflecting the increase. The return must filed no later than June 30, 2024. Oklahoma will not assess penalties or interest with respect to the failure to reflect the increase if a correct amended return is filed.

Ch. 286 (S.B. 602), Laws 2023, effective Nov. 1, 2023.

Oregon

Corporate income tax: Hedging receipts excludable from sales factor 

A corporate excise (income) taxpayer’s receipts from hedging transactions could be excluded from its sales factor because they were not derived from the taxpayer’s primary business. 

What was the taxpayer’s business?

The taxpayer was primarily engaged in a fully integrated petroleum business, which included exploring, developing, producing, and transporting crude oil and natural gas. The taxpayer used derivative commodity instruments to manage risks related to the price volatility of crude oil and other petroleum products. Those activities were the taxpayer’s hedging program. In an earlier decision, the tax court determined that if receipts from the hedging program were from the taxpayer’s primary business they could be included in the sales factor.

What did the taxpayer argue?

The taxpayer argued that the hedging receipts were inextricably linked to and inseparable from physical commodity purchases and sales. The taxpayer presented evidence that the purpose of its hedging program was not simply to maximize returns on individual trades, but rather to manage price risk associated with its purchases and sales of commodities. Thus, the receipts were derived from its primary business activity. Oregon described the hedging activity as a distinct business activity.

Were the hedging activities excludable? 

While the hedging activities could be integral to the taxpayer’s business, the receipts did not derive from or arise from the primary business activity. The source of the receipts was not developing and producing crude oil and natural gas and refining and marketing those products for sale. The hedging played a supportive role to the primary business of purchasing and selling physical commodities. Thus, the receipts from the taxpayer’s hedging program could be excluded from the taxpayer’s sales factor. 

Chevron U.S.A. Inc. v. Department of Revenue, Oregon Tax Court, No. TC-MD 190031N, May 17, 2023.

Virginia

Corporate income tax: Option to elect manufacturer’s apportionment method not limited to original returns

A taxpayer could elect to use the Virginia income apportionment method for manufacturing companies for the first time on an amended return. The plain language of the applicable code section simply did not prevent a taxpayer company from making the election on a timely amended return. The Department of Taxation made various arguments — e.g., that allowing delayed elections would go against the purpose of the manufacturer’s apportionment method — but those were rejected. The lower court had correctly concluded that the purpose behind the election was achieved, and the financial and economic effects to the Commonwealth were the same, regardless of whether the election to use the manufacturer’s apportionment method was made on an original or amended tax return. The appellate court noted that, either way, companies would be eligible only by meeting the employment and wage thresholds for three years.

Department of Taxation v. 1887 Holdings, Inc., Court of Appeals of Virginia, No. 0598-22-2, May 23, 2023.

West Virginia

Corporate, personal income taxes: Guidance on withholding requirements for pass-through entities updated

West Virginia updated a publication on income tax withholding requirements for pass-through entities. Partnerships, S corporations, estates, and trusts doing business in West Virginia or deriving income from real or tangible personal property located in the state are required to withhold corporation net income tax or personal income tax from distributions of taxable West Virginia source income to nonresident partners, shareholders, or beneficiaries. The rate of withholding is 6.5%.

TSD-390, West Virginia Tax Division, May 2023.