Statutory Analysis of Interest Disallowance within the Nebraska Advantage Research and Development Act

The provision specifying that interest is not allowed on refunded taxes in the context of the Nebraska Research and Development (R&D) tax credit means the state will not augment credit-based refunds with interest payments, regardless of how long the Department of Revenue takes to process or audit the claim. This statutory mandate, found in Nebraska Revised Statutes § 77-5804(5), serves as a fiscal safeguard that limits the state’s total expenditure to the principal amount of the incentive earned by the taxpayer.1

The Nebraska Advantage Research and Development Act represents a cornerstone of the state’s economic policy, designed to stimulate innovation by offering significant tax relief to businesses engaged in qualifying research and experimental activities. Unlike traditional tax overpayments, which typically accrue interest to compensate taxpayers for the time-value of money while the government holds their capital, the R&D tax credit is categorized as a proactive state subsidy. Because this credit is an intentional “tax expenditure” meant to incentivize specific behaviors—namely, investment in Nebraska-based innovation—the state legislature has historically viewed the face value of the credit as the complete benefit intended for the recipient. Consequently, the legal framework surrounding this act explicitly overrides the general interest provisions of the Nebraska Revenue Act of 1967. For business leaders and tax professionals, this means that while the credit provides essential liquidity, the “cost of waiting” during lengthy audit cycles is a financial burden that remains with the taxpayer. Understanding this nuance requires a deep dive into the statutory language, the administrative guidance provided by the Nebraska Department of Revenue, and the comparative legal standards that define how interest is treated across various tax types in the state.

The Statutory Landscape of the Nebraska Advantage Research and Development Act

The Nebraska Advantage Research and Development Act is codified under Nebraska Revised Statutes §§ 77-5801 through 77-5808. This specific body of law was established to reward business firms that incur research and experimental expenditures in the state, effectively bridging the gap between federal innovation incentives and state-level economic growth.2 To ensure consistency for multi-state entities, the Nebraska statutes heavily leverage federal definitions, specifically those found in Section 174 and Section 41 of the Internal Revenue Code (IRC).4

Legislative Intent and the Adopted Federal Framework

At its core, the Act provides a refundable credit to any business firm that conducts research and development activities within the borders of Nebraska. The legislative intent was to foster a competitive environment in sectors such as agriculture, manufacturing, and high-tech software development.4 By tying the state credit to federal standards, Nebraska allows taxpayers to use much of the same documentation and calculation methodologies required for the federal R&D tax credit, thereby reducing the administrative burden of compliance.4

The standard credit amount is calculated as 15% of the federal credit allowed under IRC § 41, but only for the portion of the research performed in Nebraska.3 For companies seeking to deepen their ties with local academic institutions, the state offers an enhanced credit of 35% if the research is conducted on the campus of a Nebraska college or university or at a facility owned by such an institution.5 This tiered approach demonstrates a clear policy goal: not just to encourage R&D, but to encourage a specific type of R&D that integrates private enterprise with the state’s educational infrastructure.4

Mechanism of the Credit and Refundability

One of the most attractive features of the Nebraska R&D credit is its flexibility in application. According to § 77-5804, a business firm can utilize the credit in three primary ways: it can be used to obtain a refund of state sales and use taxes paid, it can offset the taxpayer’s corporate or individual income tax liability, or it can be claimed as a fully refundable credit on the income tax return.1 This refundability is a vital lifeline for startups or firms in a loss position, as it provides immediate cash flow even in years when the company has no tax liability.4 However, it is precisely this “refundable” nature that triggers the application of subsection (5), which denies interest on these refunds.1

This table highlights the fundamental structure of the incentive, emphasizing that regardless of the rate or the location of the research, the prohibition on interest is a universal constant within the Act.1

Analysis of the “Interest Not Allowed” Provision

The specific directive that “Interest shall not be allowed on any taxes refunded under the Nebraska Advantage Research and Development Act” is a critical administrative hurdle.1 To understand its full impact, one must contrast it with the standard operating procedures for tax refunds in the state of Nebraska.

Contrast with General Tax Refund Interest (Section 77-2794)

In the general realm of Nebraska tax law, specifically the Nebraska Revenue Act of 1967, taxpayers are typically entitled to interest on overpayments.8 Under § 77-2794, the state recognizes that if a taxpayer overpays their taxes (through excess withholding, estimated payments, or errors), and the state holds that money for an extended period, the taxpayer should be compensated.8 The law generally provides a 90-day window for the Department of Revenue to process a refund without penalty. If the refund is delayed beyond 90 days from the filing date or the due date, the state begins to accrue interest at a rate determined biennially by the Tax Commissioner.8

For the period beginning January 1, 2025, this interest rate is set at 8% per year.11 In a standard scenario, a delayed refund of $100,000 could result in significant interest income for a business. However, the Nebraska Advantage R&D Act contains an “explicit carve-out.” By stating that interest is not allowed, the legislature has effectively exempted the R&D credit from the requirements of § 77-2794.1 This means that even if the Department of Revenue takes two years to audit an R&D claim before issuing a refund, the taxpayer will receive only the principal amount of the credit, with zero interest accrued.1

The Philosophical and Fiscal Rationale

The decision to disallow interest on R&D refunds is not arbitrary. It is rooted in the philosophical distinction between a “corrective refund” and an “incentive refund”.12 A corrective refund occurs when a taxpayer has paid more than they legally owed, and the state is returning the taxpayer’s own property. In contrast, an incentive refund is a benefit granted by the state for performing a specific activity. Since the R&D credit is essentially a grant delivered through the tax system, the state argues that the taxpayer has no inherent right to interest on that grant.1

Fiscally, this provision protects the state from the mounting costs of interest during complex audits. R&D tax credits are notoriously difficult to verify, often requiring deep dives into project technicalities, wage allocations, and E-Verify compliance.4 If the state were required to pay 8% interest on every dollar under audit, the incentive program’s cost would escalate rapidly, potentially exceeding the $5 million annual estimate that legislators originally projected.15

State Revenue Office Guidance and Documentation

The Nebraska Department of Revenue (DOR) provides several layers of guidance that interpret the “no interest” rule and establish the procedural requirements for claiming the credit. This guidance is primarily found in Revenue Rulings, Information Guides, and form instructions.

Form 3800N and Worksheet RD

The primary mechanism for claiming the R&D credit is Nebraska Form 3800N and its associated Worksheet RD.7 These forms require the taxpayer to detail the federal credit amount and apportion it to Nebraska activities using either property and payroll factors or actual expenditure methods.4

The instructions for Worksheet RD are explicit about the refundability of the credit at the entity level but do not provide any line item or calculation field for interest.19 This absence is the practical application of § 77-5804(5). When the DOR processes Form 3800N, the software and administrative protocols are designed to issue a check for the credit amount exactly as calculated on line 22 of the worksheet.16

Revenue Ruling 29-10-2: Enhanced Research Tax Credits

This ruling provides the definitive guidance on what constitutes “on-campus” research for the 35% enhanced credit.6 It clarifies that to qualify, the research must be performed at a facility owned or controlled by a Nebraska college or university.4 This ruling is critical because the enhanced credit is significantly more valuable and, therefore, more likely to trigger a detailed audit.4 Taxpayers utilizing this enhanced rate must be particularly aware of the interest disallowance, as the time required to verify university facility agreements can extend the refund timeline significantly.1

The E-Verify Requirement and Compliance Rulings

A major component of the DOR’s guidance involves the mandatory use of E-Verify. Since October 1, 2009, all business firms claiming the R&D credit must electronically verify the work eligibility of all new employees hired in Nebraska during the tax year of the claim.4 Revenue Ruling 29-13-3 provides detailed instructions on this mandate, stating that failure to verify even a single new hire can lead to the total disqualification of the credit.7

Because the DOR conducts thorough E-Verify audits before issuing large R&D refunds, the lack of interest becomes a factor in the company’s risk assessment. If a firm’s refund is held up for six months due to an E-Verify inquiry, the company loses the utility of those funds without any interest-based compensation from the state.1

Application to Pass-Through Entities and Owners

The interaction between the entity-level refund and the distribution of credits to owners adds another layer of complexity to the interest disallowance analysis.

Entity-Level vs. Owner-Level Treatment

The Nebraska R&D credit is earned at the entity level. For pass-through entities (PTEs) such as S-Corporations, LLCs, and Partnerships, the entity has two choices 4:

1. Direct Refund: The entity can claim a refund of state sales and use taxes paid or a refundable income tax credit. In this case, the refund is issued to the entity, and the interest disallowance of § 77-5804(5) applies.1
2. Distribution: The entity can distribute the credits to its partners, shareholders, or members.4

When the credits are distributed to owners via Nebraska Schedule K-1N, they change character: they become nonrefundable at the owner level.4 This means an individual owner can only use the credit to reduce their Nebraska income tax liability to zero.4 Any unused credit can be carried forward for 20 years, but the owner cannot receive a refund check from the state for any excess credit.4 Because there is no refund at the owner level, the question of interest on a refund does not apply to the individual taxpayer in this scenario; they simply enjoy a reduction in tax due.4

Strategic Implications for CFOs

This distinction creates a strategic choice for businesses. If a company is in a loss position and needs cash, claiming the refund at the entity level is the only way to monetize the credit.4 However, the CFO must account for the fact that this refund will not bear interest and may be subject to a lengthy audit.1 Conversely, distributing the credit to owners may provide more immediate value if the owners have significant tax liabilities, as the credit reduces their tax due on their original returns, effectively “locking in” the benefit without waiting for a state refund check.4

Historical Performance and Economic Impact Data

To understand why the state maintains these strict interest disallowance rules, it is helpful to examine the historical statistics and the legislative performance of the R&D program.

Program Usage and Fiscal Protections

Between 2006 and 2020, the Nebraska R&D program awarded $72.3 million in credits to 460 different companies.15 The high utilization rate (over 93%) indicates that the program is successful in reaching its target audience.15 However, the program has frequently exceeded the legislature’s $5 million annual estimated cost.15

These figures demonstrate that the program is a significant “tax expenditure” for the state.12 In 2020 alone, the use of over $10 million in credits represented a 100% increase over the original legislative projections.15 By disallowing interest on these refunds, the state retains a crucial “fiscal protection” that prevents the program’s cost from spiraling during periods of high audit activity or administrative backlog.13

Employment and Sector Growth

The program has been instrumental in supporting high-tech and renewable energy sectors.15 For example, 109 high-tech companies were awarded $14.8 million in credits during the same period.15 While the program stimluates growth, the cost-per-job estimates vary widely, ranging from $2,053 to $34,307 depending on whether investment credits are included.21 This high cost-to-benefit ratio reinforces the legislature’s desire to keep the incentive as lean as possible, which includes the omission of interest on refunds.12

Case Study: Practical Application and Interest Loss Example

To illustrate how the law applies in a real-world business setting, consider the example of “Omaha Tech Solutions,” a mid-sized C-Corporation developing proprietary software for the logistics industry.

The Research and Credit Calculation

For the 2024 tax year, Omaha Tech Solutions incurs $2,000,000 in total qualified research expenses (QREs). After calculating their federal credit on IRS Form 6765, they determine their federal R&D credit is $200,000.4

The company conducts 100% of its research in Nebraska, meaning the entire federal credit is apportioned to the state.4 Using the 15% standard rate, the Nebraska R&D tax credit is:

$$Credit_{NE} = \$200,000 \times 15\% = \$30,000$$

The Refund Election and Audit Timeline

Omaha Tech Solutions has a Nebraska income tax liability of only $5,000. They use the credit to offset this liability to zero and elect to receive the remaining $25,000 as a refundable income tax credit.1 They file their 2024 return on April 15, 2025.

Because the refund is large, the Nebraska Department of Revenue selects the return for a desk audit to verify E-Verify compliance for the 15 new engineers hired in 2024.4 The audit process is slow, and the DOR does not finally approve and issue the $25,000 refund check until October 15, 2026—exactly 18 months after the initial filing.

The Financial Impact of the No-Interest Clause

If this were a standard overpayment refund (e.g., from an amended return correcting an error), the company would be entitled to interest under § 77-2794.8 The calculation would look as follows:

• Principal: $25,000
• Time Period: 1.5 years (minus the 90-day grace period) = 1.25 years of interest.
• Rate: 8% per annum.11

$$Potential Interest = \$25,000 \times 0.08 \times 1.25 = \$2,500$$

However, because the refund is issued under the Nebraska Advantage R&D Act, no interest is paid.1 Omaha Tech Solutions receives exactly $25,000 on October 15, 2026.

The company’s effective benefit is reduced by the opportunity cost of that capital. At an 8% cost of capital, the “delayed” $25,000 is worth significantly less in present value terms. This example underscores the importance for Nebraska businesses to ensure their documentation is pristine, as any delay in the audit process—while not costing the state anything—costs the taxpayer real money in the form of lost interest.1

Comparative Context: Interest Rules in Other Incentive Programs

The disallowance of interest on R&D refunds is consistent with other major Nebraska incentive programs, indicating a systemic policy choice by the state.

The Invest Nebraska and ImagiNE Nebraska Acts

Similar language is found in other statutes. For example, Neb. Rev. Stat. § 77-5532, which governs the Invest Nebraska Act, explicitly states that “Interest shall not be allowable on any refunds paid because of benefits earned under the Invest Nebraska Act”.14 This historical precedent shows that the legislature has consistently applied the “no interest” rule to incentive-based refunds since at least 2001.14

The newer ImagiNE Nebraska Act, which replaced many tiers of the Nebraska Advantage Act, continues this trend.24 The state’s rationale remains that since the incentive itself is the benefit, the government should not have to pay extra for the administrative time required to distribute that benefit.12

Comparison with Neighboring States

While Nebraska’s R&D tax credit is rated highly for its competitive climate, particularly for new companies, its effective tax benefit can be lower than programs in Iowa, Kansas, or Missouri depending on how the interest rules and caps are applied.15 Some neighboring states may allow for interest on certain types of refundable credits if the state exceeds a certain processing deadline, but Nebraska’s statutory bar is one of the more rigid in the region.15 For example, Montana law requires the department to pay interest if a refund is not processed within 45 days, a stark contrast to Nebraska’s absolute prohibition in the R&D context.1

Compliance and Record-Keeping Guidelines

To mitigate the impact of the interest disallowance, taxpayers must focus on “audit readiness” to accelerate the refund process.

Record Retention Requirements

The Nebraska Department of Revenue advises that all claimants must retain records for at least three years after filing the return, or three years after the last return on which a carryforward is used.16 For R&D purposes, this generally means maintaining:

• Federal Form 6765: Detailed calculations of the base amount and the current year QREs.4
• Payroll Records: Evidence of wages paid to employees directly involved in qualified research.4
• E-Verify Logs: Confirmation numbers and dates for all Nebraska-based hires.7
• Project Summaries: Technical documentation explaining how the research meets the four-part test (Technological in nature, elimination of uncertainty, process of experimentation, and permitted purpose).3

Avoiding the “Paper Trap”

As noted in the DOR’s “Information for Individual Income Tax” booklet, the Tax Commissioner has approved and implemented electronic filing for most returns.26 While interest is never allowed on R&D refunds, filing a paper return can lead to even longer delays and is generally discouraged.26 For other types of refunds where interest might be allowed, filing on paper automatically forfeits that right.8 In the R&D context, electronic filing is the only way to ensure the quickest possible path to the principal amount of the credit.7

Conclusion: Strategic Realities of the Nebraska R&D Credit

The Nebraska Advantage Research and Development Act remains a vital and highly effective tool for promoting state-based innovation, providing substantial refundable credits that can transform a company’s balance sheet.4 However, the provision stating that interest is not allowed on refunded taxes is a significant legal and financial reality that cannot be ignored. This rule represents a clear legislative boundary: the state will provide the incentive, but it will not compensate the taxpayer for the time-value of money during the administration of that incentive.1

For the modern business operating in Nebraska, this necessitates a proactive approach to tax management. Because the Department of Revenue has no financial penalty (in the form of interest) for taking its time with an audit, the burden of speed falls entirely on the taxpayer. By maintaining rigorous documentation, ensuring 100% compliance with the E-Verify mandate, and utilizing electronic filing methods, a firm can reduce the “processing gap” and secure its capital faster.4 Ultimately, while the lack of interest on refunds is a cost of doing business in Nebraska, the value of the 15% to 35% credit—coupled with the program’s lack of a hard dollar cap—continues to make the state a premier destination for research and development activities.4 As the program moves toward its scheduled sunset in 2033, businesses that master these administrative nuances will be best positioned to maximize their return on innovation within the Cornhusker State.4

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