How does Nebraska tax an LLC and its resident individual members, and how does that differ from a partnership and its partners?

Plain-English summary

This ruling explains how Nebraska treats a limited liability company (LLC) and its resident individual members for income tax, and it flags an important difference between an LLC member and an ordinary partnership partner.

Entity classification follows federal. An LLC taxed as a partnership federally is a partnership for Nebraska and files a Form 1065N; one taxed as a corporation files a Form 1120N; and a single-member LLC that is a disregarded entity federally is disregarded for Nebraska, with its income reported on the member's own return. The federal classification is conclusive.

The member-vs-partner difference. When the company earns income from sources outside Nebraska, a resident LLC member is allowed a decreasing adjustment to federal AGI for the portion of the company's income apportioned to other states using the sales-factor formula -- but because of that adjustment, the member cannot also take a credit for taxes paid to another state on that income. A resident partner of a partnership is treated the opposite way: no decreasing adjustment, but a credit for taxes properly paid to another state is allowed. You get one benefit or the other, not both, and which one depends on whether you are a member of an LLC or a partner in a partnership.

What this means for you

Owners of Nebraska LLCs

First confirm how your LLC is classified federally -- that decides the Nebraska return (1065N, 1120N, or reported on the sole member's return). If you are a resident member and the LLC earns out-of-state income, plan around the decreasing AGI adjustment: you take it instead of, not in addition to, an other-state tax credit.

Partnerships vs LLCs

This is a genuine trap for multi-state owners: the same out-of-state income is handled one way for an LLC member (apportionment adjustment, no credit) and the opposite way for a partnership partner (no adjustment, credit allowed). Don't assume the two structures are interchangeable on a Nebraska return.

Tax preparers

Match the mechanism to the entity. The member's decreasing adjustment runs on the sales-factor formula, and claiming it forecloses the other-state credit. This ruling supersedes Revenue Ruling 25-94-1.

Common questions

Q: Which Nebraska return does my LLC file?
A: It follows the federal classification -- Form 1065N if taxed as a partnership, Form 1120N if taxed as a corporation, and (for a single-member disregarded entity) reported on the sole member's own return.

Q: Can a resident LLC member claim a credit for taxes paid to another state?
A: No. A resident member instead takes a decreasing adjustment to federal AGI for the income apportioned to other states, and that adjustment forecloses the other-state credit.

Q: Is a partnership partner treated the same as an LLC member?
A: No -- the opposite. A resident partner gets no decreasing adjustment but may claim a credit for taxes properly paid to another state.

Q: Can I rely on this Revenue Ruling?
A: A Nebraska Revenue Ruling is a general guidance document that is "advisory in nature but is binding on the Nebraska Department of Revenue until amended," and it applies generally rather than to a single taxpayer. But it can be superseded or made obsolete by a later ruling or a change in statute or regulation, so confirm you are looking at the current version before relying on it.

Citations and references

Statutes:

• Neb. Rev. Stat. § 77-2714 (federal meaning of terms; federal classification conclusive)
• Neb. Rev. Stat. § 21-104(d) (LLC classified for state income tax as for federal)
• Neb. Rev. Stat. § 77-2716(4) (decreasing AGI adjustment for an LLC member's out-of-state apportioned income)

Forms: Form 1065N (partnership), Form 1120N (corporation).

Supersedes: Revenue Ruling 25-94-1 (issued June 13, 1994).

Source

• Landing page: Nebraska Revenue Rulings
• Original PDF: 25-21-1

Original ruling text

Revenue Ruling 25-21-1
Partnership Income Tax

Supersedes Revenue Ruling 25-94-1, issued June 13, 1994

August 5, 2021

Treatment of Limited Liability Companies and
Their Resident Individual Members
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.
This guidance document may change with updated information or added examples. DOR
recommends you do not print this document. Instead, sign up for the subscription service
at revenue.nebraska.gov to get updates on your topics of interest.

Issue
How are limited liability companies and their resident individual members treated for Nebraska income
tax purposes?

Conclusion
A limited liability company (LLC) treated as a partnership for federal income tax purposes will be treated
as a partnership for Nebraska income tax purposes and will file a Nebraska Return of Partnership Income,
Form 1065N. An LLC treated as a corporation for federal income tax purposes will be treated as a corporation
for Nebraska income tax purposes and will file a Nebraska Corporation Income Tax Return, Form 1120N.
A single member LLC treated as a disregarded entity for federal income tax purposes will be treated as a
disregarded entity for Nebraska income tax purposes. The income of the disregarded entity will be reported
on the income tax return of its sole member.
For Nebraska income tax purposes, there are differences in the treatment of income of a resident member
compared to a resident partner when the income from the company is derived from sources outside
Nebraska. A member is allowed an adjustment decreasing federal adjusted gross income for the portion of
his or her share of the income of the company that is apportioned to states other than Nebraska using the
sales-factor formula. A partner is not allowed this adjustment. A member is not allowed a credit for taxes
paid to another state on income from the company, however, a partner is allowed a credit for taxes paid to
another state on income from the company.

Analysis
Under Neb. Rev. Stat. § 77-2714 any terms used in §§ 77-2714 to 77-27,123 have the same meaning as
when used in a comparable context in the laws of the United States relating to federal income tax, unless a
different meaning is clearly required. A federal classification of an entity for federal income tax purposes is
the conclusive determination of the entity’s classification for Nebraska purposes.
The Nebraska Uniform Limited Liability Company Act, Neb. Rev. Stat. § 21-104(d) provides that an LLC
is classified for state income tax purposes in the same manner as it is classified for federal income tax
purposes. Under Neb. Rev. Stat. §§ 77-2716(4) and 21-104(d), although an LLC is treated as a partnership,
S corporation, or disregarded entity for federal income tax purposes, a member of an entity organized as an
LLC is allowed an adjustment decreasing federal adjusted gross income for the portion of his or her share
of the income of the LLC which is apportioned to states other than Nebraska using the sales-factor formula.
Because of this adjustment, a member cannot take a credit for taxes paid to another state on income from
the LLC.

Nebraska Department of Revenue, PO Box 94818, Lincoln, Nebraska 68509-4818

Revenue Ruling 25-21-2

August 5, 2021

Page 2 of 2

In the same situation, a partner is not allowed a decreasing adjusted gross income adjustment. A full year
Nebraska resident individual partner reports his or her share of the partnership’s entire income to Nebraska
and may claim a credit for taxes properly paid to another state.
APPROVED:

Tony Fulton
Tax Commissioner
August 5, 2021