During its 2021 session, the Nebraska Legislature approved legislation updating the Microenterprise Tax Credit. The changes will take effect Aug. 27.
Businesses in Nebraska with five or fewer employees can use the Nebraska Advantage Microenterprise Tax Credit to help decrease the cost of business startup or expansion. Below, you will find resources to help you apply for the credit.
The Nebraska Advantage Microenterprise Tax Credit is a 20 percent refundable tax credit for up to $20,000. To qualify for the credit, an applicant must make an investment which will grow their business.
There are a number of rules and requirements that potential applicants should be aware of. More detailed information is available below and at the Department of Revenue website.
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Potential applicants must fit these criteria to be eligible.
- Be the owner or part-owner of the business.
- Be actively involved in the daily management and operation of the business. If the business is considered a passive activity for an individual, for example owning a stake in a business but not spending time directing or working on daily business activities, they are not considered actively involved.
- There is a $20,000 lifetime credit limit on an applicant and all related persons. This includes parents, if the taxpayer is a minor, children who are minors, and any business partners with a substantial stake in the business.
- If related persons have used only part of the $20,000 lifetime limit, the applicant can claim the remainder up to the $20,000 combined maximum.
- The business must have five or fewer full-time equivalent employees. Businesses without employees are also eligible. Calculating employees is shown in a section below.
An individual actively engaged in a farm or livestock business cannot have, between them, their spouse, and dependents, a net worth of more than $500,000. However, this does not apply to some business ventures, as detailed under the Exemptions and Limitations to Eligibility tab.
There are a number of business exemptions that may disqualify applicants.
- Farm and livestock operators with a net worth over $500,000 can still apply for the credit for the following activities: processing or marketing of agricultural products raised by another person; aquaculture; agricultural tourism; or the production of fruits, herbs, tree products, vegetables, tree nuts, dried fruits, organic crops, or nursery crops.
- Certain licensed professionals, such as realtors, whose licensure is subject to supervision may not be eligible. See this General Information Letter for details.
- Changing the legal status or ownership of an existing business does not create a new business for the purpose of the tax credit. Additional investment is required to claim the credit.
Other tax credits have different restrictions and requirements which do not apply to the Microenterprise Tax Credit. Below are clarifications on some common eligibility requirements.
- There are no restrictions based on the business’s location except it must be located in Nebraska.
- There is no annual revenue threshold to qualify nor is an applicant disqualified for earning above a certain amount of revenue.
- Businesses of all legal classifications (sole proprietorship, S Corporation, C Corporation, etc.) are eligible. No matter the classification, the business must be registered in the State of Nebraska.
- Both new and existing businesses are eligible. However, the required application information varies slightly for each.
Eligible businesses will be required to register employees through E-verify, and will be required to carry out a calculation demonstrating that their operation falls under the requirement of no more than five full-time equivalent (FTE) employees.
Do not confuse an employee head count and the number of FTE employees. The head count is simply the total number of employees while the number of FTE employees is calculated based upon hours paid to all employees over the course of a year.
- The Nebraska Department of Revenue considers an FTE employee to be equivalent to 40 hours per week over the course of all the weeks in a year (52 weeks if a full calendar year).
- To find your FTE employee number, calculate the total hours paid during the year and divide by 40 times the number of weeks in the paid year (2080 hours if a full 52-week year).
- A small business employs three people part-time at varying hours per week, from 5 to 25.
- Total hours paid over the course of one year: 2,600 hours
- Divided by 2,080 hours in one FTE year
- Total FTE = 1.25 FTE
For all corporations, an actively involved business owner would count toward the FTE calculation. However, for a sole proprietorship or partnership they are not added.
When applying, you will need to provide evidence of paid employee hours with a payroll register. For applicants filing between Jan. 1 and Nov. 1, include the payroll register with the date of application. Applicants who apply between Nov. 2 and Dec. 31 will need to provide a payroll register which includes the first business day of the following year (Jan. 4 in 2021).
The first payroll period for a new business cannot exceed 200 paid hours (40 hours times 5 employees) or the business will be disqualified.
For new start-ups, the business is not fully operational during a period in which the expenses incurred are classified as start-up expenditures under I.R.C. § 195. The employee count is reported when the business becomes fully operational.
The tax credit is for 20 percent of a qualifying investment up to $20,000. This means the applicant must invest money into their business in order to receive the tax credit. Eligible investment is defined broadly and most major business expenditures will qualify. Some examples include:
- Building or property purchase,
- Depreciating asset purchase,
- Repairs and maintenance to property,
- Lease of buildings or building space,
- Lease of depreciable property,
- Legal and professional fees,*
- New compensation not over 150 percent of the Nebraska average weekly wage ($1,380/week or $71,760/annually in 2021), and
- Increased employer health insurance coverage.
Note: The purchase, lease, or repair and maintenance related to vehicles licensed by the Nebraska Department of Motor Vehicles are not qualifying investments.
In general, major business expenditures will count as an investment. Physical building space, large and/or expensive equipment, and payment of employees are typical investments. There is no minimum investment size required. However, because of the maximum credit amount, any investment over $50,000 will not generate additional tax credits.
Proof of investment
An applicant will need to both estimate their investment while applying and provide documentation of the investment once it has been made to claim the credit. This means an applicant must retain receipts, invoices, deeds, and other records demonstrating what has been invested.
Timeline of investment and claim
Applicants can make the investment over two consecutive tax years. An applicant should understand these terms used to describe the change in investment.
Base Year: This is the tax year before any investment is made and typically the year before an application is submitted. (When filing between Nov. 2 and Dec. 31, the base year will be the same calendar year as that in which the application was submitted.) Any investments made during this year cannot be claimed. It is used to compare for investment, revenue, and employment increases. For new businesses, the base year should be the equivalent of 0 for all of those metrics. When applying, you will need to provide tax filings and other documentation from the business reflecting this year.
Year of Application: The tax year after the base year is the year that you will apply for the credit and start your investment. For most applicants, this means the same year as you are applying. Nov. 2 to Dec. 31 applicants will begin the Year of Application on the following Jan. 1. Any investment made during this year will be claimed early the following year while filing taxes.
Year After the Application: An applicant can also make an investment in the tax year following the application year. Any investment made during this year will be claimed early the following year, the Final Year to Claim Investments, while filing taxes.
Final Year to Claim Investments: This refers to the tax season following the Year After the Application when you claim investments made during the Year After the Application.
Note: All applications filed after Nov. 1 of a given year will be considered as an application for the following tax year. This means if you file between Nov. 2 and Dec. 31, any investment should wait until Jan. 1 or later, otherwise it will not be made in the correct tax year. Example: If a business owner applies on Nov. 15, 2020, their Base Year is now 2020 and the year of Application becomes 2021.
For businesses applying between Jan. 1 and Nov. 1, 2021
Base Year: 2020
Year of Application: 2021
Year After Application: 2022
Final Year to Claim Investments: 2023
For businesses applying between Nov. 2 and Dec. 31, 2021
Base Year: 2021
Year of Application: 2022
Year After Application: 2023
Final Year to Claim Investments: 2024
*Legal and professional fees includes fees paid to individuals, such as certified public accountants, professional engineers, and attorneys for services related to the activities of the microbusiness.
All applicants can access the application on the Department of Revenue website or by clicking here. The Microenterprise Tax Credit Guide follows along with the application and provides clarification. Business owners can apply on their own or with assistance from an accountant or other professional.
If the business has employees or plans to hire them, the business will need to be registered on E-Verify before applying. Visit e-verify.gov to create an account and store the business’s information. Employee information must be updated throughout the project period.
Applicants will need the following information about their business to complete the application:
- Applicant and business identification,
- Number of employees and FTE employees,
- E-Verify business verification page,
- Description of the business and its activities,
- Detailed expansion plans,
- Description of new income or jobs that will be created if applicable,
- Description of applicant’s involvement in the business,
- Estimated credit used by related persons, and
- Estimated expenditures which the business will make.
The following documentation will also need to be attached with the application:
- Most recent filed tax return for the applicant and business, see Guide for specifications.
- Most recent W-3N from the business, the Nebraska Reconciliation of Income Tax Withheld.
- A copy of the payroll register which includes the first work day of the application year or the application date, whichever is later.
- Sales and Use Tax ID number and Income Tax Withholding number or (for unlicensed businesses) a copy of Completed Form 20, the Nebraska Tax Application Form.
- For farmers and livestock owners, a current net worth statement signed by a lawyer, banker, loan officer, financial counselor, or accountant with their title and claim to accuracy.
- Applicants who are purchasing an existing business and claiming investments beyond business purchase should also include:
- The prior business’s federal income tax return(s);
- The most recent form W-3N and W-2s;
- Records of business sale: purchase documents, financial records, personnel records, asset ledgers, etc.; and
- Property tax filings from the previous year.
To claim the credit, you must file a form 3800N Worksheet M and all required attachments with your taxes. A number of forms will need to be attached to the filing. Those items are listed below.
For the base year and current year:
- Federal income tax return for yourself and the business,
- Tax depreciation schedule,
- Signed lease agreements for any buildings or depreciable personal property,
- Year-end payroll register with total hours paid over the year and salaried staff,
- Form W-3N and all W-2 forms, and
- Health insurance billing showing employer contribution.
For the current year only:
- A detailed list of claimed expenditures,
- Legible copies of all invoices supporting business investment expenditures,
- Lease calculation worksheet if applicable, and
- E-Verify employment confirmation for each employee hired after the application date.