New Jersey has enacted a so-called SALT – State and Local Tax – cap workaround to help pass-through businesses in the state.
The Pass-Through Business Alternative Income Tax Act allows a refundable gross income tax credit for taxpayers earning income from pass-through businesses.
It’s intended to help the state’s small businesses hurt by the $10,000 cap on state and local tax deductions that is part of the federal Tax Cuts and Jobs Act.
Under the new act, pass-through businesses that have New Jersey distributable proceeds, as defined as New Jersey sourced income, including all net income, dividends, royalties, interest, rents, guaranteed payments, and gains subject to tax in New Jersey taxed at the entity level.
The business will then be able to deduct the state alternative tax paid against their federal taxable income. The business’s partners or shareholders will receive a refundable credit to be applied against their New Jersey individual state income tax, based on their pro-rata share of the income.
The following business entity types are eligible for this credit:
- All Partnerships, S-Corporations, and LLCs which have at least one member subject to the income tax in New Jersey.
- This includes entities with a tiered ownership structure, as well.
- Estates and trusts are not considered eligible pass-through entities, however they would be considered eligible partners/shareholders.
- If a partnership, S-Corp, or LLC has an estate/trust as an owner, they will still be eligible to make the election to have the income taxed at the entity level.
It remains to be seen if the IRS will allow this deduction, as it may be construed as another attempt at avoiding the $10,000 cap on state and local tax deduction on a taxpayer’s individual income tax return. Under current federal tax laws, taxes may be assessed directly against a partnership or S corporation’s federal income based on the entity’s related trade or business, as opposed to state taxes assessed at the partner’s or shareholder’s allocable taxable income.
Under the act, the entity-level tax will be calculated based on multiplying the business’s New Jersey sourced income by the following rates:
- 5.675% on the entities distributive proceeds under $250,000
- 6.52% on the entities distributive proceeds between $250,000 - $1,000,000
- 9.12% on the entities distributive proceeds between $1,001,000 – $5,000,000
- 10.9% on the entities distributive proceeds above $5,000,000
For the partners and shareholders, each of their share of the tax credit is equal to their pro-rata share of the tax paid by the entity.
For corporate partners/members, they are permitted to take the credit against their New Jersey surtax and their corporate business tax liability. Any excess credit allocated to the corporate partners/members will be treated as an overpayment and carried forward for 20 years.
Estates and trusts have the flexibility to either allocate the credit to the beneficiaries or use against the estate/trust’s tax liability.
Quarterly estimated payments are due on April 15, June 15, Sept. 15 and Jan. 15 once the election has been made for a calendar year taxpayer. If making the election, the taxpayer cannot request a tax return extension, as the entity level tax liability is due by the original due date of the return.
We are prepared to help New Jersey pass-through entities submit elections to the New Jersey Division of Taxation to take advantage of this new tax credit. Please contact us for assistance.