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Nebraska Advantage Microenterprise Tax Credit Act
Application Guide

Revised March 2016


CAUTION

The Nebraska Advantage Microenterprise Tax Credit Act (Microenterprise Act) requires participants to utilize E‑Verify, the federal electronic verification program, to ensure that new employees are legally able to work in the U.S. An application will not be accepted unless the microbusiness is registered for E-Verify. Nebraska tax incentives will not be granted unless the applicant proves that the microbusiness has electronically verified the work eligibility status of all newly hired employees employed in Nebraska.

E-Verify is a free and simple to use web-based system that electronically verifies the employment eligibility of
newly hired employees. E-Verify allows participating employers to electronically compare employee information taken from the Form I-9, Employment Eligibility Verification, against the Social Security Administration’s and the Department of Homeland Security’s databases. For additional information, go to the U.S Citizenship and Immigration Services’ website and click on the E-Verify button at the left of the page.

Introduction

The Microenterprise Act provides an individual actively involved in the operation of a microbusiness a refundable individual income tax credit based on demonstrated growth of the business over two tax years. The Microenterprise Act has $2 million available for each calendar year through December 31, 2019 to provide tax credits to individual applicants for creating or expanding microbusinesses. The applicant earns a credit equal to 20% of the increase in new investment and new employment at the microbusiness in the year of application and the year after application. The total lifetime tax credits claimed by any single applicant and any related persons are limited to $10,000.

An individual may file another Nebraska Advantage Microenterprise Tax Credit Act Application (application) after the first two-year application period has ended. The individual may claim no more than the difference between the $10,000 lifetime limit and the amount previously approved or the pending amount previously reserved.

If the application is intended to benefit more than one individual actively involved in the microbusiness each individual should submit a separate application, reference each individual as a related person on the application, and split the estimated amounts of new investment and new employment accordingly.

Eligibility Requirements

The Microenterprise Act requires that the following eligibility requirements be met at the time of application:

  • The individual applying must be actively engaged in the operation of a microbusiness with personal involvement on a daily basis in the management and operation of the microbusiness. Any individual for whom the microbusiness is considered a passive activity for federal income tax purposes is not actively engaged in the operation of the microbusiness.

  • Qualified Locations - For applications filed on or after January 1, 2016, the areas in all Nebraska counties are eligible EXCEPT certain areas in Buffalo, Cheyenne, and Washington counties as described below:

    • In Buffalo County, Census Tracts 9689, 9690, 9691, 9693, 9694, 9695, 9696, and 9697 are eligible areas, but Census Tracts 9692.02, 9692.03 and 9692.04 are not eligible, with the following exception:

      • In Census Tracts 9692.02, 9692.03 and 9692.04, any area within the city of Kearney is eligible.

    • In Cheyenne County, Census Tract 9548 is an eligible area, but Census Tracts 9549 and 9550 are not eligible.

    • In Washington County, Census Tracts 501.01, 501.02 and 503 are eligible areas, but Census Tracts 502.01 and 502.02 are not eligible, with the following exception:

      • In Census Tract 502.01, any area within the city of Kennard is eligible.

  • To find the census tract for a location, go to the U.S. Census Bureau website and enter the address.

  • The microbusiness must employ five or fewer equivalent employees at the time of application. The number of equivalent employees is computed by dividing the total hours paid in a year by the product of forty times the number of weeks in a year. For ease of administration the Department requires that the applicant provide documentation to show the total hours paid during the pay period that includes January 4, 2016 or the application date, whichever is later.

    Note: The number of equivalent employees does not equal the number of people employed in many cases. A part time employee equals less than one equivalent. An employee who worked overtime may equal more than one equivalent.

    The Department reserves the right to request payroll registers for additional payroll periods if it suspects that the payroll information provided does not accurately reflect the number of equivalent employees employed at the microbusiness at the time of application. For example, an applicant who has one or more employee take unpaid leave during the requested pay period, possibly compensating those employees later with a bonus equal to their regular compensation, is improperly manipulating the application process. In another case, an applicant may terminate the employees of the microbusiness and rehire them when the payroll period is complete. In such cases, the Department will request documentation for additional payroll periods.

  • Farmers and Livestock Operators - An application will not be accepted from an individual actively engaged in the operation of a farm or livestock operation with a net worth of more than $500,000, including any holdings by a spouse or dependent, based on fair market value. A microbusiness involved in the following activities is not subject to the $500,000 limitation for farm and livestock operations: processing or marketing of agricultural products raised by another party; aquaculture; agricultural tourism; or the production of fruits, herbs, tree products, vegetables, tree nuts, dried fruits, organic crops, or nursery crops.

    Farmers and livestock operators must provide a current net worth statement, including any holdings by a spouse or dependent, based on fair market value. The net worth statement must be signed and dated by the applicant and a lawyer, banker, loan officer, financial counselor, or an accountant, who gives his/her title and states in writing that the information provided on the statement appears to be accurate. The net worth statement must reflect the value of the applicant’s holdings as of the date of application.

  • A microbusiness under the Microenterprise Act must use E-Verify, a federal electronic verification program, to ensure that Nebraska employees hired after the date of application are legally able to work in Nebraska. An applicant must provide proof of registration with E-Verify at the time of application.

    Prior to approval of the Microenterprise Act tax incentive benefits, and during subsequent reviews of benefits claimed, the applicant must provide proof of timely employment confirmation. Examples of documents for the applicant to retain include, but are not limited to: 

    • E-Verify Case Verification Number;

    • Copies of the Case Details page which includes the Case Verification Number; and

    • The User Audit Report which provides general data on cases.

Benefits will not be granted unless the applicant can prove that the work eligibility status of all newly hired employees employed in Nebraska has been electronically verified in a timely manner. All hours worked by, and compensation paid to, an employee who is not eligible to work in Nebraska will be excluded from the calculation of any tax incentive. Please see Revenue Ruling 29-13-3 for additional information.

Establishing an Application Date

The application date will determine the base year used for employment and investment calculations. The date of a completed application will be used to determine the priority for the authorization of the project’s expected benefits. There is a total of $2 million available for each calendar year through 2019.

The certified mailing receipt stamped by the United States Postal Service (USPS) or a USPS postmark will serve as the verification of the date mailed, and becomes the application date. If an application is mailed other than by certified mail, or does not have a USPS postmark, the date received will serve as the application date. 

If more than one complete application is filed on the day in which the cumulative expected benefits for the year exceed $2 million, the remaining available funds will be prorated among the applicants on that day.

Any applications filed after November 1 will be treated as applications filed on the first business day of the following calendar year. The application must clearly indicate that it is intended to be an application for the following year and the appropriate base year must be used on the Estimated Expenditures and Microenterprise Tax Credits Computation, Table 13.

To avoid delays in the Department’s initial review of your application, all items in Part 1 of the application must be properly completed. If any of these items are omitted or are incomplete, the application date will be determined by the date on which the last of these items is received.

Part 1 - Application

Employees

Item 1

The number of people currently employed is a head count of persons on the payroll of the microbusiness during the pay period that includes the date of application.

Item 2

The number of equivalent employees is computed by dividing the total hours paid in a year by the product of forty times the number of weeks in a year. The number of equivalent employees does not equal the number of people employed in many cases.

Item 3

To receive credits under this program the applicant must provide evidence that the taxpayer has electronically verified the work eligibility status of all newly hired Nebraska employees.
For Item 3(a)(i), print out the "Company Information" page from the E-Verify program and include it with your application as an attachment. An example of the "Company Information" page is shown below:

Example of Company Information

Base Year

Item 4

Provide a description of the microbusiness. Include a description of type of activities the microbusiness is engaged in including the types of products sold and the markets served during the base year. The planned expansion of the microbusines will be described later in Items 8 and 9.

Item 5

State whether the microbusiness is a corporation, S corporation, limited liability corporation, partnership, or sole proprietorship. State the entity type under which the income tax return for the microbusiness will be filed for the base year or indicate that the microbusiness' income will be included in the applicant's individual income tax return.

Item 6

Identify the beginning and ending dates for the microbusiness' tax year which includes the date of application. If this does not agree with the tax return submitted please provide an explanation.

Item 7

State whether, during the tax year prior to the tax year which includes the date of application, the microbusiness was organized as an entity type different than the entity type under which it is currently organized.

Expansion

Item 8

At a minimum, the response to Item 8 should explain the estimated figures provided in Table 13.

Item 9

To be eligible for credit, the applicant must demonstrate not only that that he or she will make new investment or employment in the microbusiness but also that the new investment or employment will create new income or jobs in a distressed area.

Personal Involvement

Item 10 and 11

The applicant is actively engaged in the operation of the microbusiness. Active engagement requires personal involvement on a continuous basis in the daily management and operation of the microbusiness. Please explain the nature and significance of your involvement in the microbusiness. Please specify the frequency of your involvement including the number of hours per week you are engaged in the operation of the microbusiness.

Estimated Credit

Item 12

The applicant must provide information on any related person who has applied under the Microbusiness Act. The microenterprise tax credits are subject to a lifetime limit of $10,000 for an applicant and any related persons. "Related persons" is defined in Neb. Rev. Stat. 77-5903(6) to include:

  • Entities that would be part of the same unitary group if incorporated;

  • A person considered to be related under either Internal Revenue Code 267(b) and (c) or 707(b); or

  • Any individual who is a spouse, parent, son, daughter, brother, or sister of the applicant.

Table 13 Estimated Expenditures and Microenterprise Tax Credits Computation Table

The application requires an estimate of the increase in new investment and compensation. The amounts in this table must be reflected in the written response to item 8.

If a related person (see the response to item 12) has applied, the base year figures and the estimated growth of the microbusiness must be shared and reflected in the responses to Table 13. 

Example 1. Two equal partners apply and intend to equally share the microenterprise tax credits. In the base year, the microbusiness had $10,000 in new investment. On each partner’s application, in Column A, $5,000 should be used as the base year's new investment figure. 

Example 2. The microbusiness anticipates purchases of $50,000 in new investment in Year 1. Each partner should enter $25,000 in Column B reflecting his or her share of the microbusiness growth estimate. This same process continues for Year 2 and for the other categories reflecting the growth of the microbusiness.

Base Year. The base year is the tax year prior to the tax year of application. The base year investment and compensation activity must be established before incentive credits can be calculated on growth in the application tax year, and the tax year following application. Column A of Table 6 must reflect the investment and compensation activities of the business in the base year.

  • If an existing business is purchased in either the application year or the year following application, the base year information in Column A of Table 13 must reflect the total base year activities of the original business and the newly acquired business.

  • If the microbusiness is under new ownership through the purchase of an existing business, by the reorganization of an existing business, or by the spinning off of part of an existing business, the employment and investment of the business under the previously existing ownership or structure should be reported as base year investment and compensation in Column A.

  • If a change in ownership or entity structure results in a short tax year the investment and compensation expenses in the base year must be annualized to reflect a full year of expenses. To annualize expenses, divide the expense (investment or compensation) by the number of months included in the short tax year and multiply by 12.

    Example. The base year of the microbusiness is a short tax year 1/1/14 through 5/31/14. Investment in the base year was $50,000. Annualized investment for the base year is $120,000 [0,000/5)*12].

Investment. Investment means the sum of the following costs incurred by the microbusiness: depreciable asset purchases; repairs and maintenance; advertising; legal professional fees; and the cost to purchase or lease buildings or depreciable property. Legal/professional fees are fees paid to individuals required to be licensed to perform the service. Examples include certified public accountants, professional engineers, and attorneys. There is new investment when the costs in the current year exceed those of the base year. Expenditures related to vehicles that are required to be licensed by the Nebraska Department of Motor Vehicles cannot be used for new investment calculations.

Net Lease Increase. The net lease increase is the value of leased property, and must be calculated as shown in the Lease Calculation Worksheet below. In Table 13, the application requires a comparison of a base year lease of buildings and/or depreciable personal property to a new lease of buildings and/or depreciable personal property in either Year 1 or Year 2 of your application. There is an increase in leased property if the taxpayer has a new lease and there is an increase in the annual lease payment, even if it is not the first time the property has been leased. The increased investment is equal to the change in the annual lease costs multiplied by the term of the lease, not to exceed ten years.

Please use the following Lease Calculation Worksheet and example to determine your lease increase.  Include the lease increase figure from the Lease Calculation Worksheet in either the Year 1 or Year 2 box for new investment, Columns B or D, in Table 6 of the application.

Lease Calculation Worksheet
A
B
C
D
E
F

Description of
Leased Property*

Annual Lease
Costs
(Old Lease)
Annual Lease
Costs
(New Lease)
Increase
(Column C - B)
Term of
New Lease
Net Lease
Increase
(Column D X E)
           
           
Total Net Lease Increase  
*The value for a lease with increasing annual rental payments is the average annual payments.
Example 3. My old lease for office space was an annual lease with $750/mo lease payments. My new lease for office space has a 60-month (5 year) term at $1,000/mo. Using the Lease Calculation Worksheet, my lease increase over the life of the new lease is $15,000 (see below).
Lease Calculation Worksheet (Example 3)
A
B
C
D
E
F
Description of
Leased Property*
Annual Lease
Costs
(Old Lease)
Annual Lease
Costs
(New Lease)
Increase
(Column C - B)
Term of
New Lease
Net Lease
Increase
(Column D X E)
Office Space
$ 9,000
$12,000
$ 3,000
5 yrs
$ 15,000
 
 
 
 
 
 
Total Net Lease Increase
$ 15,000
*The value for a lease with increasing annual rental payments is the average annual payments.

Compensation and Employer Health Insurance Contribution. Compensation and employer health insurance contribution means the increase in the total compensation plus the employer cost for health insurance for Nebraska resident employees in the current year as compared to the base year. New employment does not include compensation paid to any employee in excess of 150% of the Nebraska average weekly wage. For applications filed for calendar year 2016, 150% of the Nebraska average weekly wage is $1,188.

Item 14

Copies of the most recent federal income tax return filed for the applicant and the microbusiness must be sent in with the application. At a minimum, the federal income tax returns should include copies of:

  • First five pages of the individual and business returns;
  • Consolidating schedules supporting the first five pages;
  • Affiliations Schedule, Form 851;
  • A copy of each Shareholder’s Share of Income, Credits, Deductions, etc., Schedule K-1;
  • Profit or Loss from Business, Schedule C;
  • Profit or Loss from Farming, Schedule F; and
  • Depreciation and Amortization, Form 4562.  

If the microbusiness is a flow-through entity, list the owners, their ownership percentage, and their Social Security numbers.

Item 15

A microbusiness is a business with five or fewer equivalent employees at the time of application or January 4, 2016, whichever is later.

Example 4. An applicant applies on January 4, 2016 and the microbusiness has a weekly payroll schedule. The payroll period, including January 4, 2016, cannot exceed 200 hours paid to employees (5 full-time equivalent employees x 40 hrs per week) in order to meet eligibility requirements for the Microenterprise Act.

  • Enclose a copy of your business's most recent Nebraska Reconciliation of Income Tax Withheld, Form W-3N, filed.
     
  • Submit a copy of the payroll register showing total hours paid to all hourly and salaried employees for the period that includes the date of application. The payroll register which includes the date of application must be submitted within ten days of the close of the pay period.

  • If you currently do not have any employees, please indicate the date you expect to begin paying wages.

  • The Department reserves the right to request payroll registers for additional periods as part of the review of the application.

Item 16

Each microbusiness is required to be fully licensed according to the Nebraska licensing requirements listed on the Nebraska Tax Application, Form 20. Even if the microbusiness is not required to be licensed for sales tax, it must be licensed for use tax. Line 13 of the Form 20 relates to the use tax.

The Form 20 can be completed, signed, and submitted with your application.

Item 17

A net worth statement must be provided by any individual actively involved in a microbusiness that conducts farming or livestock operations.

The net worth statement must include holdings of the applicant, spouse, and dependents. The statement must be based on the fair market value of assets net of any related debt. Types of assets to report on the net worth statement include, but are not limited to: land; equipment; livestock; grain; cash; investments; homes; and motor vehicles.

The net worth statement must be signed and dated by the applicant and a lawyer, banker, loan officer, financial counselor, or an accountant, who gives his/her title and states in writing that the information provided on the statement appears to be accurate. The net worth statement must reflect the value of the applicant’s holdings as of the date of application. The net worth statement must be provided within 30 days after the date of application.

Signature

Part 1 of the application must be signed by the individual actively involved in the microbusiness or other person authorized to sign for the applicant by a power of attorney on file with the Department. Attach a copy of a completed Power of Attorney, Form 33.

Part 2 - Total Credits Reserved

The Department of Revenue will confirm the total credits reserved for an applicant by completing Part 2.  A copy will be returned to the applicant.

Schedule I - Nebraska Advantage Microenterprise Tax Credit Act Claim

To claim the credits on your Nebraska Individual Income Tax Return, Form 1040N, file a completed Nebraska Incentives Credit Computation, Form 3800N. Also, complete all applicable lines on Schedule I of this application and attach it to your tax return for the year of application and the year following application.Schedule I is calculated with the actual increased investment and compensation, and must reflect accurate base year activity. You must provide a copy of the documents requested in Schedule I to support your credit calculation.

Nebraska tax incentives will not be granted unless the applicant provides a copy of the E-Verify employment confirmation page for each newly hired employee employed in Nebraska, confirming that employment is authorized.

The claim must have adequate documentation for the Department to determine the validity of the claim.  The following are the minimum requirements for adequate documentation:

  • Enclose a detailed listing of the investment expenditures claimed on Schedule I, Current Year Credit Computation Table, Column B. Submit the information on a CD or email an Excel file to rev.incentives@nebraska.gov referencing "Microenterprise" in the subject line. The spreadsheet should include the following information:
Vendor Name
Invoice Date
Invoice Number
Item Description
Amount
Column B,
Line Number

  • Attach legible copies of all invoices supporting purchases of depreciable assets, repairs and maintenance, advertising, and legal and professional fees; arranged in the same order as they appear in the spreadsheet.

If a related person (see Part 1, item 5) has applied, the actual growth of the microbusiness must be shared and reflected on the Current Year Credit Computation Table.

Example 5. Two equal partners apply for microenterprise tax credits. In Year 1, the microbusiness had $50,000 in actual purchases of depreciable asset. On each partner’s application, on Schedule I, the Current Year Credit Computation Table, Column B, line a, $25,000 should be used as the Year 1 depreciable asset purchases figure.

This same pro rata process should be used for the other categories on the Current Year Credit Computation Table to properly reflect the actual growth of the microbusiness.

If you plan to electronically file your Form 1040N, all substantiating documentation listed on Schedule I of your application may be filed as a PDF with your electronically filed return. If your software does not support filing PDFs with your return, you can still e-file the return. You may also file your Form 1040N on paper and attach all substantiating documentation listed on Schedule I of your application to your return.

If you have any questions regarding the preparation of this application, please contact Julie Burcham at 402-471-5827 or julie.burcham@nebraska.gov. The application should be sent to:

Nebraska Department of Revenue
301 Centennial Mall South
PO Box 98944
Lincoln, NE 68509-8944


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