Can a Nebraska S corporation with an Employment and Investment Growth Act (LB 775) agreement elect the single sales-factor apportionment formula, even though the credit itself flows through to shareholders?

Plain-English summary

Nebraska's Employment and Investment Growth Act (enacted as LB 775) gave companies that signed an incentive agreement the option to apportion their Nebraska corporate income using a single sales factor -- the share of sales in Nebraska -- instead of the usual multi-factor formula. That single-factor election often lowers the Nebraska tax for a company that has lots of property and payroll in the state but sells mostly out of state. This ruling answers whether an S corporation (a pass-through whose income is taxed to its shareholders) can make that election.

The core holding: "An S corporation may elect to use the single factor formula as provided in section 77-4105 of the Employment and Investment Growth Act."

The Department gets there in a few steps:

• Section 77-4105 lets a taxpayer who has signed a section 77-4104 agreement elect to determine taxable income for the Nebraska corporate income tax (section 77-2734.02) by multiplying federal taxable income, as adjusted, by the sales factor only.
• Section 77-4103 defines "taxpayer" broadly -- it expressly includes "any partnership, subchapter S corporation, or joint venture" whose partners, shareholders, or members are subject to Nebraska sales/use and income or franchise tax. So an S corporation is a "taxpayer" that can sign an agreement and make the election.
• Section 77-2734.01(2) sets how a small business (S) corporation apportions: if it is a member of a unitary group, it apportions using the same apportionment factor determined for the entire unitary group (sections 77-2734.05 to 77-2734.15); if it is not in a unitary group, it apportions under those same sections.

Putting it together: the other corporations in a unitary group with the S corporation cannot themselves be S corporations under federal law, and they are "taxpayers" who may elect the sales-only formula -- so a unitary S corporation, required to use the group's factor, ends up using the sales-only formula too. And an S corporation outside a unitary group must apportion "in a manner consistent with methods used by other corporate taxpayers," including S corporations in unitary groups. Therefore, all S corporations may use the sales-only apportionment formula for Nebraska income tax purposes.

What this means for you

An S corporation with an LB 775 (Employment and Investment Growth Act) agreement

You are not shut out of the single sales-factor election just because you are a pass-through entity. If you have signed a qualifying agreement, you may apportion Nebraska income using the sales factor only, the same as a C corporation.

An S corporation inside a unitary group

Your apportionment factor follows the group. Because the non-S members of the group can elect the sales-only formula and you must use the group's factor, you effectively apply the sales-only formula as well.

Advisers modeling the election

The benefit runs through to the shareholders, who report the apportioned Nebraska income. Model whether the single sales factor actually reduces the Nebraska apportionment percentage for the specific business before electing, and confirm the current statutes, since the incentive program and apportionment sections have evolved since 1988.

Common questions

Q: Can an S corporation use Nebraska's single sales-factor formula?
A: Yes. The ruling holds that an S corporation may elect the single (sales-only) factor formula under section 77-4105 of the Employment and Investment Growth Act.

Q: Why is an S corporation eligible when the tax is paid by shareholders?
A: Section 77-4103 defines "taxpayer" to include subchapter S corporations, so the entity can sign the agreement and make the election; the apportioned income then flows through to the shareholders.

Q: What if the S corporation is part of a unitary group?
A: It must use the same apportionment factor as the group. Since the group's other members can elect the sales-only formula, the S corporation uses that formula through the group's factor.

Q: Can I rely on this ruling today?
A: It is the Department's general policy and is "binding on the Nebraska Department of Revenue until amended," but it is not tailored to your facts and the underlying incentive program has changed over time. Verify current law and consult a Nebraska tax professional.

Citations and references

• Nebraska Revenue Ruling 29-88-1, "Economic Development Tax Incentives -- Use of the Single Factor Apportionment Formula by an S Corporation" (Nebraska Department of Revenue, issued April 7, 1988; approved by State Tax Commissioner Donald S. Leuenberger).
• Neb. Rev. Stat. § 77-4105 (single sales-factor election); § 77-4104 (agreement); § 77-4103 (definition of "taxpayer"); § 77-2734.02 (corporate income tax); § 77-2734.01(2) (S / small business corporation apportionment); §§ 77-2734.05 to 77-2734.15 (apportionment factors). Statute citations are to R.S.Supp., 1987, as quoted in the ruling.

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr298801_single_factor.pdf

Original ruling text

Revenue Ruling 29-88-1

Use of the Single Factor ApporEconomic Development Tax lncentives
AN S CORPORATION lvlAY
tionment Formu la by an S Corporation
.

ELECT TO USE THE SINGLE FACTOR FORlvlU LA AS PROVIDED lN
sEcTtoN 77-410s oF THE EfuIPLOYIvIENT AND INVESTIVIENT GROWTH
ACT.

Advice has been requested as to whether ah S corporation can elect to
determine taxable income by using the sales factor only formula as provided in the Employment and lnvestment G rowth Act.
Section 77-4105, R.S.Supp., 1987, for purposes of the Employment and
lnvestment Growth Act, provides in part that:

(1) A taxpayer who has signed an agreement under
section 77 -4104 may elect to determine ta xable
income for purposes of the Nebraska corporate
incgme ta x imposed by section 77 -2734 .02 by
multiplying federal taxable income, as . adjusted, by the sales factor on ly.
Section 77-4103, R.S.Supp.,,l987, for purposes of the Employment and
lnvestment G rowth Act, provides in part that:
(1?)

Taxpayer shall mean any person subject to the
sales and use taxes and either an income tax
imposed by the Neb ras ka Reven ue Act of 1967

or

a

franchise tax

under

Chapter 77,

article 38, any corporation that is a member of
the same unitary group which is subject to
such taxes, and any partnership, subchapter
S corporation , or joint ventu re when the pa rtners, shareholdens, or members are subj ect to
such taxes;

Section 77-2734.0'l provides, in part, that
(2) (a)

lf the small business corporation is a member of a unitary group, the small business
corporation shall be deemed to be doing
business within this state if any part of
its income is derived from transactions
with other members of the u n ita ry g roup
doing business within this state, and such
corporation shall apportion its income by
using the apportionment factor determined
for the entire unitary group, including
the small business corporation, under
section s 77 -2734.05 to 77 -2734.15,

Revenue Ruling 29-88-1

(b)

Page 2

lf the small business corporation is not a

member of a unitary group, it shall apportion its i ncome u nden section s 77 -2734 .05
to 77-2734.15.

Since the other corporations that are members of the unitary group
with the S corporation cannot be S corporations under federal law, and
such other corporations are specifically included in the definition of
taxpayer under the Act, those corporations may elect the sales only

apportionment formula. Section 77-2734.01 (2) (a) requires the
S corporation that is a member of a unitary group to use the same
apportionment factor as the rest of the group. As a result, the S
corporation that is a member of the unitary group can use the sales
only apportionment formula to determine the portion of its income that
is derived from sources within this state.
ln addition, the S corporation that is not a member of a unitary group
is required under section 77 -2734.01 to determine the portion of its
income that is derived from sources within this state in a manner
consistent with methods used by other corporate taxpayers, including
an S corporation that is a member of a unitary group. Therefore, all
S corporations may use the sales only apportionment formula for
Nebraska income tax purposes.
ED

d S. Leuenb er9er
State Tax Commissioner

April 7, 1988