New Jersey enacts elective pass-through entity tax as workaround to federal SALT cap
A recently signed New Jersey law gives businesses an election to pay an entity-level tax on income rather than have each partner, member, or shareholder of the business pay their tax individually. The elective entity-level tax is intended to be a workaround to the $10,000 cap on state and local tax deductions for federal income tax purposes as enacted in 2018. This New Jersey legislation is similar to those passed in other states, including Connecticut, Louisiana, Oklahoma, Rhode Island, and Wisconsin, in order to provide relief to taxpayers affected by the cap on state income tax deductions. It also provides an offsetting refundable income tax credit for members who earn income from a pass-through entity.
What to know about the election
The Pass-Through Business Alternative Income Tax Act (the Act), effective for tax years beginning on or after Jan. 1, 2020, allows New Jersey pass-through entities (partnerships, LLCs with at least two members, and S corporations) with at least one member or shareholder who is liable for the New Jersey gross income tax to make an election to pay income taxes at the entity level. The election is only available if each member or shareholder consents. It must be made annually on or before the due date of the entity’s return and on forms prescribed by the New Jersey Division of Taxation.
Pursuant to the Act, taxpayers who earn income from pass-through entities and pay the elective entity-level tax receive a refundable income tax credit. Under the 2017 Tax Cuts and Jobs Act (TCJA), there is no limitation on deductions for state taxes paid at the entity level.
For business entities that choose to pay this entity-level tax, the tax imposed is equal to each member’s distributive share of proceeds attributable to the pass-through entity multiplied by four tax brackets. The four tiers of income tax rates assessed on a partner or member’s distributive proceeds are:
- 5.675% for the first $250,000 of distributive income;
- 6.52% for distributive income between $250,000 and $1 million;
- 9.12% for distributive income between $1 million and $5 million; and
- 10.9% for distributive income exceeding $5 million.
Partners and S corporation shareholders may be able to claim a refundable credit on their personal New Jersey income tax return for their share of the tax paid by the entity.
Corporate partners are also permitted to claim a tax credit against their New Jersey Corporation Business Tax (“CBT”) for taxes paid on their behalf by the pass-through entity. They cannot take so much credit so as to be below the state’s minimum tax, but any excess credits can be carried forward for 20 years.
What does CohnReznick think?
Because the election is made at the entity level and requires consent of all partners, members, or shareholders, taxpayers should discuss the potential outcomes of making this election with their tax advisor, including both benefits and any federal IRS risks, while being mindful of the due date for making the election.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightNew regulations proposed for post-2019 income tax withholding, with guidance for new W-4Dana FriedEffective for 2020, there are new proposed regulations for income tax withholding on employee wages, including a new W-4. Here’s what to know.
InsightIRS Form 1023, application for exempt status, now must be filed electronicallyLori Rothe Yokobosky, Glenn SheltonAs of Jan. 31, 2020, organizations seeking exempt status under IRC Section 501(c)(3) are required to file Form 1023 electronically. Here’s what to know.
InsightSpending act adjusts excise tax rate on certain private foundations’ net investment incomeLori Rothe Yokobosky, Thomas Lanning, Dan MascielloThe latest federal rules mean more NII excise tax for some private foundations and less for others, but all will save the time and cost of determining which rate to pay.
Press ReleaseCohnReznick forms Exempt Organizations Tax practice, appoints Yokobosky Practice LeaderCohnReznick LLP, one of the leading advisory, assurance, and tax firms in the United States, has reorganized its not-for-profit tax professionals into the new Exempt Organizations Tax Services practice, which is now part of the firm’s National Tax practice.
InsightInterest expense limitations to trigger changes in financing private equity dealsIn an article for Bloomberg Tax, CohnReznick’s Jeremy Swan discusses how private equity firms can address new business interest expense limitations under IRC Section 163(j).
InsightA reminder regarding nondeductible employer-provided employee parking expensesDana FriedHow should a business calculate its amount of nondeductible expenses for employer-provided employee parking? Brush up on current guidance on IRC Sec. 274(a)(4).