A tax-saving technique for New Jersey pass-through businesses has been improved under a new state law enacted this week that will help small business owners realize even greater savings on their federal income tax returns.
NJBIA supported the changes to the Business Alternative Income Tax (BAIT) to rectify issues that had arisen in the way the state Division of Taxation had implemented the original 2020 law, which allows pass-through businesses to choose to pay income taxes at the entity level rather than the personal level. The law signed Tuesday by Gov. Phil Murphy, fine-tunes how BAIT is calculated so that a larger federal credit can be obtained by choosing to use the state Business Alternative Income Tax.
Several years ago, SobelCo Managing Member Alan D. Sobel proposed the BAIT concept to give New Jersey pass-through entities a workaround to the $10,000 cap on state and local tax (SALT) deductions imposed by the federal Tax Cuts and Jobs Act of 2017. The tax reform passed by Congress had essentially eliminated the federal tax deduction for state taxes paid on the profits of the business whose revenues flowed through their owners’ personal returns.
The original BAIT law allowed residents and non-residents who receive New Jersey-sourced income from pass-through entities to pay the business alternative income tax and receive a credit for all or part of this tax against their own personal state tax liability – effectively treating the state tax obligation as a business expense. In the first fiscal year of adoption, New Jersey business owners who opted to use the BAIT tax method saved an estimated $500 million.
The revisions to the state law enacted this week modify how the optional tax is calculated so that all income, not just New Jersey-sourced income, is subject to the tax if the business owner is a New Jersey resident, thereby allowing a larger credit to be obtained by paying the Business Alternative Income Tax.
The highest tax bracket now includes distributable income over $1 million to align with the tax brackets used by individuals on the state’s Gross Income Tax, which further helps business owners benefit from the law. Another revision codifies that overpayment of BAIT taxes by a pass-through entity can be either applied to future estimated taxes or refunded.
For more information about the savings BAIT can provide pass-through businesses, as well as details of the revisions recently made under P.L.2021, c.419, the new law sponsored by Senator Paul Sarlo (D-36) and Steve Oroho (R-24), read the latest SobelCo bulletin here.