New Jersey Enacts "Elective Pass-Through Entity Business Alternative Income Tax"

By James (Jay) M. Brower, Jr.  |  January 14, 2020

It’s not too often that you hear about business-friendly tax legislation coming out of Trenton, but every now and then the State Assembly and Governor do something right.

Yesterday, New Jersey Governor Phil Murphy enacted the “Pass Through Business Alternative Income Tax Act” which is effective for tax years beginning on and after January 1, 2020.

Under the Act, any pass-through business entity (an NJ S Corporation or any partnership/LLC) which has at least one shareholder/partner/member who is subject to the Gross Income Tax may make an annual election to pay an entity-level income tax imposed at graduated rates from 5.675% to 10.9% on the entity’s NJ-source income.  For NJ S Corporations, the elective tax is in addition to any other taxes that the corporation may be liable for, such as the minimum tax, built-in gains tax and/or professional corporation fee.

Since the tax is imposed on the business entity itself and not its individual owners, the intent behind the legislation is that for federal tax purposes the tax will be deductible “above the line” as a business tax and not subject to the annual $10,000 SALT cap.  Several other states (CT, LA, RI and WI) have enacted similar taxes on passthrough entities in the past two years as workarounds to the federal SALT deduction limit.  So far, Treasury has not issued any proposed, temporary or final regulations which attack these new tax systems.

Individual and corporate owners of electing entities must still report their distributive share of the entity’s income on their NJ tax returns.  Individuals are entitled to claim a refundable credit against their NJ GIT liability for their share of the entity-level tax.  Corporate partners/members are likewise entitled to a credit against their CBT liability, but any credits passed through to them are not refundable.  Excess credits may be carried forward for up to 20 taxable years.

Over the next year, the NJ Division of Taxation will need to promulgate rules and regulations which implement the legislation for items such as:

  • How the election is filed and who may make it?
  • Provisions for estimated taxes
  • Effects on partnership withholding tax requirements
  • Combined reporting implications

As is mentioned above, the new law is effective January 1, 2020, and may not be applied retroactively.  Consequently, it won’t affect 2019 tax filings, but it is something to keep in the back of your mind for purposes of 2020 tax planning.

Please feel free to contact me if you have any questions about this new legislation.

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About James (Jay) M. Brower, Jr.

Jay Brower, CPA, is a Partner of corporate and individual tax compliance and research services at Marks Paneth, LLP. He has more than 20 years of professional experience at the federal, state, and local levels. Mr. Brower's duties also include the development of tax planning and implementation strategies, as well as education and development of the firm's professionals. Mr. Brower provides tax planning and compliance services to clients in the manufacturing, commercial fishing, telecommunications, professional... READ MORE +

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