New Jersey has enacted the “Pass-Through Business Alternative Tax Act” (BAIT). This act creates an election for pass-through entities (PTE’s) to pay New Jersey income tax at the entity level and creates a corresponding individual income tax credit for the members of the PTE’s. This law was passed in response to the Federal Tax Cut Jobs Act, passed in December 2017, that restricted individuals to a maximum $10,000 SALT itemized deduction on their Form 1040. The PTE election applies to tax years beginning on or after January 1, 2020. Eligible PTE’s include entities that file New Jersey partnership or New Jersey S corporation tax returns.
To make the election, each member of the PTE must consent to the election or an authorized member can consent to the election on behalf of all the members. The election must be made (or revoked) annually on or before the original due date (without extensions) of the entity’s New Jersey tax return. The election cannot be made retroactively. The New Jersey PTE election must be made on an annual basis. At least one member of the PTE must be subject to the New Jersey gross income tax to make the election.
Electing PTE’s must file a BAIT tax return and pay the entity level income tax by the 15th day of the third month following the end of their tax year (March 15th for calendar-year taxpayers). Estimated tax payments must be made by the PTE by the 15th day of the fourth, sixth, and ninth month of the taxable year, and by the 15th day of the first month following the close of the tax year. Since 2020 is the first year of the BAIT tax, taxpayers will not be penalized for underpayment of estimated taxes under the safe harbor rules.
Each member will be taxed on their distributive share of PTE income, as if the PTE was an individual taxpayer. The BAIT tax rate ranges from 5.675% (distributive share under $250,000) to 10.9% (distributive share over $5 million). The individual members of the PTE are allowed a refundable New Jersey gross income tax credit equal to their pro rata share of the BAIT tax paid by the BTE.
On the surface, this looks like a wise tax move as it would shift taxes on the pass-through income from being non-deductible to deductible and circumvent the IRS cap on SALT deductions.
Our tax group can review the options available to your business to help the owners decide if this voluntary election should be pursued. At this time, the State has not issued guidance and we are waiting to see the information that will be released. Before making a decision to make the election, business owners should take the following into consideration:
- This is a presidential election year and any changes in the White House or Congress could repeal the SALT Cap and restore the full tax deduction.
- The IRS could challenge the treatment of the election. Should the IRS prevail, this would cause additional federal tax to be paid on an amended return, plus possible under payment of estimated tax penalties, along with interest.
- A double taxation on the state level could occur for non-residents as the credit paid for taxes to New Jersey, on behalf of the partners/shareholders of the pass-through entity, would not be available to offset the income on their resident state tax return.
The election forms, tax forms, and estimated tax forms have not yet been created. We will provide updates on our website as soon as more information is available.
At BKC, our experienced professionals are available to help businesses navigate through the available options and compliance reporting. For more information, please contact us and visit our blog for more helpful information.