Nebraska companies and individuals must confront a number of tax defense issues with the Nebraska Department of Revenue.
Below is a selection of the issues we are seeing recently in audits and appeals.
Business Buyers & Sellers
The purchase or sale of a business is often a whirlwind for participants, as they must address a myriad of issues and make many decisions in a short period. The following are some of the Nebraska tax issues being addressed in audits and appeals when not handled in the planning stage:
- Tax Exemption on Sale/Purchase: If the assets of a business are purchased, advisors should ensure the purchase is structured to take advantage of potential sales tax exemptions on the sale of business assets.
- Incentive Transfers: Many businesses have Nebraska incentive projects. If not properly transferred, the buyer and/or seller can lose a significant part of the expected incentives.
- Capital Gain Exclusion Requirements: Nebraska has a capital gain exclusion for sales of stock by Nebraska resident shareholders, but that exclusion has several requirements that must be strictly adhered to in order to qualify.
Companies Expanding in Nebraska
Nebraska offers a number of meaningful incentives for companies that are expanding in Nebraska. This includes companies that are building a new facility, adding a new business or product line, or moving an existing business into Nebraska. Here are some of the audit and appeal issues we are seeing:
- Qualified Business: Imagine Nebraska Act incentives are available for businesses engaged in qualifying business activities. It is critical that an incentive application properly defines the qualifying business activities from the outset or be challenged later.
- Base-Year Employment & Investment: If the base-year employment and qualifying types of investment at a project are not addressed at the outset, this can result in audit uncertainty in the future.
- Manufacturing Equipment Sales Tax Exemption: This is a different result depending on whether an Option 1, 2, or 3 installation contractor is used.
- Construction Contracts: Construction contracts generally need to have certain tax and incentive provisions in order to help a company qualify for the full amount of expected project incentives.
Former Residents Keeping a Home in Nebraska
The Department of Revenue has been focusing on the tax residency of persons who moved out of Nebraska but kept a house or condominium here. In the past year, a couple of new cases have been decided by Nebraska courts on this issue. Continued focus by the Department of Revenue on this issue is expected. Some issues include:
- Documenting Location: A number of cases have turned on the number of days that taxpayers are in—and out of—Nebraska. Documenting these, particularly when tax assessments can go back several years, is an issue. Clients who plan to have multiple homes need to keep good records.
- Domicile Consistency: A person’s “domicile” is dependent on many factors. The Department of Revenue has been looking beyond just those factors listed in its published guidance.
- Measuring Days In & Out of Nebraska: At issue in recent cases has been the methodology for counting the number of days a person is in Nebraska. The Department of Revenue (incorrectly, we believe) wants to treat a travel day, in which a person travels into or out of Nebraska, as being in Nebraska for a full day. Depending upon a person’s travel schedule, this can have a significant impact on the question of residency.
Companies Owning Foreign Subsidiaries
Companies have been going global at an ever-increasing rate. The passage of the Federal Tax Cuts and Jobs Act of 2017 created two new types of income for companies with foreign subsidiaries: Section 965 Income (taxed under Internal Revenue Code Section 965) and GILTI (Global Intangible Low-Taxed Income). Nebraska companies and advisors should be aware of what’s occurring now:
- Department of Revenue Wants to Include This Income in Nebraska Taxable Income: As confirmed in recent pronouncements, the Department of Revenue proposes that Section 965 Income and GILTI—even though gained from foreign sources—must be included in a corporation’s Nebraska Taxable Income. This can have a significant tax impact for international companies doing business in Nebraska. This position is being challenged.
- Apportionment Factors: The Department of Revenue has proposed that companies with Section 965 Income and GILTI should use a special apportionment formula that does not allow companies to include the sales that generated this foreign income in the denominator of the apportionment formula. This position is also being challenged.
- Overriding Defenses: Based on the unusual way the Department of Revenue issued the Balance Due Notices regarding Section 965 Income and GILTI, we have raised two other overriding defenses to the Department’s proposed tax assessments. If successful, these create a full line of defense against the Department’s Section 965 Income and GILTI tax assessments.
The Nebraska Department of Revenue continues to aggressively audit and assess Nebraska taxpayers. This article has briefly highlighted a few of the areas we are seeing. Our guides, the Anatomy of Resolving State Tax Matters and the Nebraska Business Expansion Decision Guide, contain other examples.
Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As state and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate, defend, and resolve tax matters and obtain various business expansion incentives. See their websites at www.NebraskaStateTax.com and www.NebraskaIncentives.com for more information. For a copy of their publication, The Anatomy of Resolving State Tax Matters, or their Nebraska Business Expansion Decision Guide, please visit their websites or contact them at (402) 341-3070 or at nniemann@mcgrathnorth.com or mottemann@mcgrathnorth.com, respectively.
