Knowledge and Insights
NJ Pass-Through Owners Can Now Either Fish the Tax Waters or Cut New Jersey BAIT
By: Jane SyseskeyNew Jersey Pass-Through Business Alternative Income Tax (NJ BAIT) Act was passed in January 2020 and is effective for 2020. This act was designed to help business owners mitigate the negative impact of the federal state and local tax (SALT) deduction limitation of $10,000 on individual tax returns. Although there was initially some concern that the IRS would challenge the validity an entity level election to pay SALT, they have recently announced that they will allow it.
Pass-through entities may make an election (annually) no later than the 15th day of the third month after the close of the tax year (March 15th for calendar year filers) to pay the NJ BAIT on behalf of its shareholders, partners or members. Fiscal year pass-through entities may make the election for taxable years beginning on or after January 1, 2020.
Pass-through entities are defined as Federal S-Corporations that have made the NJ S-Corporation election, Partnerships, and Limited Liability Companies (LLC). Single member LLCs and Sole-Proprietors are not Pass-through entities as it relates to the Act.
Business owners that live outside New Jersey must take care in considering the election to avoid double taxation for the same income in their resident state. While it is typical that states permit credits for income taxes paid to other jurisdictions to avoid double taxation, since the New Jersey tax is being paid by the entity it is uncertain if other states will allow a credit for the NJ BAIT paid on behalf of the non-resident owner. This would result in income being subject to state tax twice – once in New Jersey and a second time in the owner’s state of residence.
For tax years after December 31, 2020 pass-through entities that elect to pay NJ BAIT will be required to file quarterly estimated tax payments. If the entity is a cash basis taxpayer, it should pay the 4th quarter estimated tax payment by December 31st to take the deduction on the current year entity tax return.
For the tax year 2020, the first year the NJ BAIT is available, taxpayers will not be penalized for failure to file or make estimated tax payments.
If an entity wants to revoke its election, the pass-through entity will receive all its estimated tax payment made for the NJ BAIT back by electronically filing the Revocation and Claim for Refund form.
Pass-through entities are still responsible to remit the tax on behalf of its nonresident partners in accordance with the statutes. Nonresident individuals, estates and trusts are still required to file a nonresident tax return if they meet the Gross Income Tax filing threshold. Entities can elect the NJ BAIT and still file a composite return (NJ-1080-C) on behalf of its qualified nonresident members who elect to be included in the composite filing.
The tax rates for NJ BAIT range from 5.675% to as high as 10.9% on New Jersey sourced income. The tax is calculated on every member’s share of distributive proceeds including tax exempt members. An exempt corporate member can claim a refund for tax paid by the pass-through entity on its share of distributive proceeds.
If you have any questions about NJ BAIT or any other tax-related issue, Mercadien’s Tax Services Group is here to assist you. Contact us at [email protected] or 609-689-9700 for more information.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.
