The Mechanics of Credit Distribution to Owners: A Comprehensive Guide to the Nebraska Advantage Research and Development Tax Credit

Credit Distribution to Owners represents the regulatory mechanism by which a pass-through entity—such as a partnership, S-corporation, or limited liability company—allocates its earned Nebraska research and development tax credits to individual stakeholders. Under Nebraska law, this process transforms a credit that is refundable to the business entity into a nonrefundable tax asset for the individual owner, which may only be applied against their personal state income tax liability.1

The conceptual foundation of “Credit Distribution to Owners” is rooted in the “pass-through” nature of modern business structures, where the entity itself does not pay income tax but instead “passes through” its income, losses, and credits to its constituents. In the specific context of the Nebraska Advantage Research and Development Act, the distribution mechanism ensures that the financial incentives for innovation reach the taxpayers who ultimately bear the economic risk of the business’s research activities. While the entity has the option to retain the credit and seek a direct refund—an attractive option for startups in a loss position—the distribution path is often preferred by profitable entities where owners face significant personal tax burdens. This report explores the statutory framework, administrative requirements, and strategic implications of this distribution process, providing a granular look at how Nebraska incentivizes technological growth through its tax code.

The Statutory Architecture of the Nebraska Research Tax Credit

The Nebraska Advantage Research and Development Act was enacted as part of a broader legislative package designed to maintain Nebraska’s competitive edge in the high-tech, manufacturing, and agricultural sectors. The act, primarily governed by Nebraska Revised Statutes § 77-5801 through § 77-5807, establishes a credit that mirrors the federal research credit but adapts it to state-specific policy goals.1

Central to this act is § 77-5803, which defines the eligibility and calculation of the credit. The law allows a “business firm” to claim a credit for research and experimental expenditures as defined in Section 174 of the Internal Revenue Code.4 The term “business firm” is broadly interpreted to include various legal structures, ensuring that the incentive is available regardless of whether the business is organized as a corporation or a pass-through entity.5

Two-Tiered Credit Calculation System

Nebraska utilizes a two-tiered system for calculating the R&D credit, specifically incentivizing collaborations with the state’s higher education infrastructure. The differentiation between off-campus and on-campus research is a critical distinction that affects the total credit amount available for distribution to owners.2

The enhanced rate of 35% is particularly significant for companies engaged in deep-tech or agricultural bioscience, as it more than doubles the standard incentive for projects that leverage the resources of institutions like the University of Nebraska.5

Multi-State Apportionment and Jurisdiction

For business firms operating across multiple state lines, Nebraska law requires a precise apportionment of the federal credit to ensure only Nebraska-sourced research activities are rewarded. According to § 77-5803(2), a firm may determine this amount by taking the ratio of research expenses incurred in Nebraska to total research expenses, or by an alternative apportionment method sanctioned by the Tax Commissioner.4 This prevents the “exportation” of the credit to activities conducted in other jurisdictions and maintains the fiscal integrity of the state’s incentive program.1

The Meaning and Process of Credit Distribution

When a pass-through entity—specifically an S-corporation, partnership, or LLC treated as such—earns a Nebraska R&D credit, the entity faces a strategic choice: utilize the credit at the entity level or distribute it to the owners. This decision is formalized through the filing of Form 3800N and Worksheet RD.2

Defining the Distribution Path

In legal terms, “distribution” is the formal assignment of the credit’s value to the partners, shareholders, or members in the same proportion as they share in the entity’s income or loss.2 Unlike some tax attributes that may be specially allocated, Nebraska generally requires the credit distribution to mirror the distributive share of income reported on the federal return.2 This proportionality ensures that the tax benefit aligns with the economic ownership of the entity.

The distribution mechanism is essentially a “transfer of utility.” At the entity level, the credit has the potential for refundability, meaning the entity can receive a check for the credit amount even if it has no tax liability.1 However, once the credit is “distributed,” its character changes. For the individual owner receiving the credit via a Schedule K-1N, it becomes a nonrefundable credit.1

Procedural Mechanics: Form 3800N and Worksheet RD

The local state revenue office—the Nebraska Department of Revenue (DOR)—provides clear instructions on how this distribution is recorded. The primary vehicle for this is the Nebraska Incentives Credit Computation, Form 3800N.11

1. Calculation on Worksheet RD: The entity first calculates the total credit on Worksheet RD, applying the 15% or 35% rates to the apportioned federal credit.2
2. Schedule A Entry: If the entity chooses to distribute the credit, it must complete Schedule A of Worksheet RD. This schedule acts as a ledger, listing each recipient’s name, ID number, and ownership percentage.2
3. Reporting on Form 3800N: The total credit amount is then entered on Form 3800N. For a distributing entity, the amount is entered on the lines designated for “distributed credits”.10
4. Issuance of K-1N: Finally, the entity issues a Nebraska Schedule K-1N to each owner, which provides the specific dollar amount the owner is entitled to claim on their individual return.11

State Revenue Office Guidance and Administrative Rulings

The Nebraska Department of Revenue frequently issues guidance to clarify the application of the law, particularly regarding the nuances of the R&D credit. One of the most significant guidance documents is Revenue Ruling 29-10-2, which addresses the “on-campus” vs. “off-campus” distinction for the enhanced credit.8

Revenue Ruling 29-10-2 and Campus Definitions

The DOR has ruled that for the purposes of the 35% enhanced credit, “college or university” refers to an institution of higher learning offering degree programs. Crucially, the ruling clarifies that the phrase “in this state” applies to the location of the campus or facility where the research occurs, not necessarily the home office of the university itself.8 This means a company collaborating with an out-of-state university that has a physical research facility in Nebraska could still qualify for the enhanced credit, provided the activity is geographically localized within the state.8

The E-Verify Requirement: A Compliance “Cliff”

A critical piece of administrative guidance relates to the employment verification requirement. Since October 1, 2009, the Nebraska DOR has mandated that all business firms claiming the R&D credit must electronically verify the work eligibility of all employees hired in Nebraska during the tax year using the federal E-Verify system.6

The implications of this guidance are absolute: if a company fails to use E-Verify for a single Nebraska hire in the tax year, the entire R&D credit is forfeited.2 This creates a high-stakes compliance environment for pass-through entities. If the entity is disqualified due to an E-Verify error, the owners receive no credit distribution, potentially leading to unforeseen tax liabilities at the individual level. The DOR requires taxpayers to maintain E-Verify logs and federal Form 6765 for at least four years as part of their audit-ready documentation.1

Pass-Through Entity Tax (PTET) and the Distribution Landscape

The introduction of the Pass-Through Entity Tax (PTET) in 2023 via LB 754 has added a layer of complexity and opportunity to the distribution of R&D credits. The PTET allows an eligible partnership or S-corporation to elect to pay Nebraska income tax at the entity level, which serves as a workaround for the federal $\$10,000$ cap on state and local tax (SALT) deductions.12

Interaction with R&D Credits

When an entity makes a PTET election, it becomes a taxpayer in its own right for state purposes. It can then use its earned R&D credits to offset the PTET liability.12

If the entity uses the R&D credit to reduce its PTET, the credit is effectively “distributed” in the form of a lower entity-level tax bill, which then flows to the owner as a smaller personal income tax credit but a more valuable federal tax deduction.12 The PTET rate is scheduled to decrease over the coming years, mirroring individual rate reductions.12

This descending rate schedule means that the value of the R&D credit as a PTET offset remains high, even as the base tax liability decreases.12

Analysis of Credit Refundability and Carryover Limits

The most common point of confusion for owners is the “disappearing refundability” of the R&D credit. To understand the law’s application, one must distinguish between the “originator” and the “recipient” of the credit.1

Entity Level: The Power of Refundability

At the entity level, the Nebraska R&D credit is unique among incentives because it is “fully refundable”.1 This means that if a startup spends $\$1,000,000$ on qualified Nebraska research and generates a $\$30,000$ state credit, but has zero tax liability, the state will issue a check for $\$30,000$ to the company.1 This provides immediate liquidity to reinvest in further research or operations.

Owner Level: The Nonrefundable Constraint

When that same $\$30,000$ is distributed to the owners (e.g., two $50\%$ partners receiving $\$15,000$ each), it loses its refundable character.10 If a partner only owes $\$5,000$ in Nebraska income tax, they can use $\$5,000$ of the credit to wipe out their bill, but they cannot receive a check for the remaining $\$10,000$.11

The 20-Year Carryforward: A Long-Term Asset

Because the credit is nonrefundable to the owner, the 20-year carryforward provision is the owner’s most valuable tool.5 This allows the owner to treat the unused portion of the credit as an asset for the next two decades.5 In the context of the Nebraska Advantage Act, this long carryforward period reflects the state’s understanding that R&D investments often take years to yield the taxable income that the credits are intended to offset. It is important to note that the enhanced university credit (35%) generally has a shorter carryforward period (4 years) compared to the standard credit (20 years), necessitating careful tax sequencing.5

Illustrative Example: The “AgriTech Solutions” Case Study

To see how the law, DOR guidance, and distribution rules intersect, we can examine a hypothetical Nebraska-based partnership.

Background and Research Activities

AgriTech Solutions, a partnership with three equal partners (Partners A, B, and C), is based in Lincoln, Nebraska. In 2024, the partnership conducted two primary research projects:

1. Project GrainGuard: In-house development of drought-resistant sensors. Qualified expenses in Nebraska were $\$600,000$.
2. Project SoilSense: A collaborative project conducted on the campus of the University of Nebraska-Lincoln (UNL). Qualified expenses were $\$200,000$.

Step 1: Calculating the Credit at the Entity Level

Using the standard federal credit estimation (roughly $10\%$ of QREs), the partnership determines its federal R&D credit is $\$80,000$.

• Nebraska Portion of Federal Credit: $100\%$ (all research in Nebraska).
• Off-Campus Portion (75% of expenses): $\$60,000$ federal share $\times 15\% = \$9,000$ Regular Credit.
• On-Campus Portion (25% of expenses): $\$20,000$ federal share $\times 35\% = \$7,000$ Enhanced Credit.
• Total Nebraska Credit: $\$16,000$.

Step 2: Compliance Check

The partnership confirms it has used E-Verify for all three new Nebraska employees hired during the 2024 tax year. This ensures the credit is valid.6

Step 3: Distribution Decision

The partnership decides to distribute the credits to the partners to help them offset the taxes owed on their share of the partnership’s $\$300,000$ in taxable income.

Step 4: Individual Filing (Partner A)

Partner A’s share of partnership income is $\$100,000$. Assuming a $5.84\%$ tax rate, their Nebraska tax liability is $\$5,840$.14

• Partner A applies their $\$5,333$ in distributed R&D credits.
• Tax Due: $\$5,840 – \$5,333 = \$507$.
• Partner A uses the full credit in the current year because their liability exceeds the credit amount. They attach their K-1N and Form 3800N to their 1040N to substantiate the claim.11

Statistical Context of Nebraska Business Incentives

Nebraska’s incentive landscape is defined by its transition from the Nebraska Advantage Act to the ImagiNE Nebraska Act. According to the 2024 Incentives Annual Report, the state continues to manage a significant volume of outstanding credits.15

Historical Credit Performance

Data from previous fiscal years highlights the significant role these credits play in the state’s fiscal planning.

The Nebraska Advantage Research and Development Credit specifically contributed $\$0.9$ million to $\$1$ million in used credits in earlier reporting periods, though this figure has grown as more companies have adopted the program.17 The “earned vs. used” gap is a critical metric for the state, as it represents the “liability overhang” from nonrefundable credits being carried forward by owners.17

The Impact of LB 754

Since the 2023 legislative session, the state has projected a revenue shift as more pass-through entities move toward the PTET. This shift is expected to increase the immediate “usage” of credits at the entity level, potentially reducing the long-term carryforward balances held by individuals.12

Future Outlook and Legislative Trends

The Nebraska Advantage Research and Development Act is not a permanent fixture; it contains a sunset provision currently set for tax years beginning after December 31, 2033.7 This long horizon allows businesses to plan multi-year research trajectories with confidence.

Emerging Themes in Distribution

Two major trends are likely to shape the future of R&D credit distribution in Nebraska:

1. Rate Convergence: As Nebraska individual income tax rates continue to drop toward the target of $3.99\%$ in 2027 and beyond, the “tax appetite” of individual owners will decrease.12 This may make entity-level refundability (choosing not to distribute) more attractive for businesses, as the owners may no longer have enough liability to absorb the credits in a reasonable timeframe.
2. Increased Audit Scrutiny: With the state facing a projected budget shortfall of over $\$ 400$ million for the upcoming biennium, the Department of Revenue is likely to increase its scrutiny of incentive programs.18 Ensuring that R&D activities meet the “Four-Part Test” and that distribution schedules perfectly match ownership percentages will be paramount for avoiding disallowance.

Conclusion

Credit Distribution to Owners is the cornerstone of Nebraska’s effort to democratize the benefits of innovation across its business community. By providing a clear, statutory pathway for pass-through entities to move tax credits from the corporate balance sheet to the individual owner’s tax return, the state ensures that the incentive for research remains potent even in non-corporate structures.

The local revenue office guidance provides the necessary “rails” for this process, emphasizing the critical importance of proper form filing (3800N and Worksheet RD) and non-negotiable compliance requirements like E-Verify. While the shift from a refundable entity-level credit to a nonrefundable owner-level credit requires careful financial planning, the 20-year carryforward provision offers a robust safety net that preserves the value of the incentive over time. As Nebraska continues to refine its tax code through the PTET and rate reductions, the R&D credit will remain a vital tool for companies seeking to lead the next generation of technological advancement in the Cornhusker State.

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