Nebraska imposes a franchise tax on all financial institutions qualified to do business in Nebraska. This tax is imposed on the “privilege” of doing business in Nebraska and is based on the financial institution’s average deposits. The tax applies irrespective of whether the financial institution operates as a C corporation or S corporation. Thus, a practitioner advising a financial institution doing business in Nebraska must understand the basics surrounding the Nebraska financial institution franchise tax.
The franchise tax applies to “financial institutions” regardless of whether an S election is in effect. Financial institutions chartered or qualified to do business in Nebraska are subject to a Nebraska franchise tax for the privilege of doing business in Nebraska. R.R.S. Neb. § 77-3802(1). The tax applies regardless of whether the financial institution is an S corporation or C corporation for tax purposes. The tax is imposed on all “financial institutions,” defined as any national or state bank qualified to do business in Nebraska and a subsidiary of any such bank. R.R.S. Neb. § 77-3801(4).
The tax is based on the “average deposits” of the financial institution.
The first step in determining the amount of tax is to determine the financial institution’s “average deposits.” R.R.S. Neb. § 77-3802(2). To determine the “average deposits” the practitioner must necessarily determine the institution’s “deposits.”
For this purpose, “deposits” include all funds that are placed in the financial institution’s custody for safekeeping or convenience that may be withdrawn by a depositor either at will or under the terms of an agreement with the financial institution. Deposits also include amounts for which a certificate may be issued and which are payable on demand, on certain notice, or at a fixed date or time (i.e., CDs). Deposits do not include any money placed in a fiduciary capacity in the trust department of any financial institution having trust powers so long as the trust department does not place the funds into the financial institution as a deposit (i.e., the funds must be segregated). R.R.S. Neb. § 77-3801(3).
If the institution operates on a calendar year, “average deposits” are the sum of the deposits held on March 31, June 30, September 30 and December 31 (i.e., quarterly), plus December 31 of the preceding year, divided by five. If the institution operates on a fiscal year, the average deposits are the sum of deposits held on the last day of the fiscal year, the last day of the preceding fiscal year, and the last day of each calendar quarter that falls during the fiscal year, divided by the number of amounts added together. R.R.S. Neb. § 77-3801(2).
The tax rate is expressed in cents and is currently capped at 3.81 percent of net financial income.
The rate of tax is currently $0.47 on each $1,000 of average deposits. The rate is computed by multiplying 12.3 by 48.8 of the maximum corporate income tax rate, which is currently 7.81 percent. R.R.S. Neb. §§ 77-3803, 77-3804. The franchise tax is expressed in cents and must be rounded to the nearest cent. R.R.S. Neb. § 77-3803. Thus, the rate of tax on each $1,000 of average deposits is computed as follows:
12.3 × (48.8 × 7.81) = 46.88 cents, rounded to 47 cents
Regardless of the amount of deposits, the total tax is subject to a cap, called the “limitation amount.” The limitation amount is the product of the net financial income of the financial institution multiplied by the limitation rate. R.R.S. Neb. § 77-3804(2). The limitation rate is 48.8 multiplied by the maximum corporate income tax rate (i.e., 48.8 × 7.81 = 3.81 percent) of a financial institution’s net financial income. R.R.S. Neb. § 77-3804(1). For this purpose, “net financial income” means the income of the financial institution, including income from fiduciary activities, interest, rent, and service charges, after ordinary and necessary expenses but before income taxes and extraordinary gains or losses. Ordinary and necessary expenses include fees, depreciation on furniture and equipment, interest, salaries and benefits, and supplies. These computations must be computed according to the regular books and records of the institution. R.R.S. Neb. § 77-3801(5).
In addition, if a financial institution is taxable in other states besides Nebraska, its Nebraska franchise tax is computed based on the average amount of deposits accepted at Nebraska offices and deposits solicited from Nebraska residents (even if accepted at out-of-state offices). R.R.S. Neb. § 77-3805(1). Moreover, the tax cannot exceed 3.81 percent of the net financial income apportioned to Nebraska. Apportionment is based on property and payroll factors formerly used to apportion corporate income tax. R.R.S. Neb. § 77-3805(2).
A return is due annually and shareholders of an S corporation receive a credit for the tax.
Each financial institution subject to the franchise tax must file a return and make payment in full by the 15th day of the third month after the end of its tax year (i.e., March 15 if the institution operates on a calendar year). R.R.S. Neb. § 77-3806(1). The form used is Form 1120NF. For tax years on or after January 1, 2007 and before January 1, 2009, a shareholder of a financial institution that is an S corporation will receive a nonrefundable credit against income tax equal to 50 percent of the shareholder’s portion of the amount of franchise tax paid by a financial institution. R.R.S. Neb. § 77-2715.07(5)(a). For years after January 1, 2009, the credit is 100 percent of the tax. R.R.S. Neb. § 77-2715.07(5)(b). The credit is reported in the same manner and portion as the S corporation’s income is reported by the shareholder. No carry back or carry forward is allowed in any year. R.R.S. Neb. R.R.S. Neb. § 77-2715.07(5)(c).
Example: A bank operates on a calendar year ending December 31. The deposit on December 31, 2006 was $10 million. The deposits on March 31, 2007, June 30, 2007, September 30, 2007, and December 31, 2007 were each $15 million. Thus, the “average deposits” are ($10 million + $60 million) / 5 = $14 million. The tax is $0.47 for every $1,000 of average deposits = $6,580. If the bank is an S corporation, its 50 percent shareholder will receive a credit equal to 25 percent of the tax for the 2007 tax year ($1,645).
These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.