January 20, 2020

New Elective Pass-Through Entity tax for New Jersey

By Paul Graney, Partner, Tax & Business Services

Related Services State & Local Tax, Tax Advisory Services, Tax & Business, State-by-State Tax Credits & Incentives

New Elective Pass-Through Entity tax for New Jersey State & Local Tax

On December 14, 2019, the state of New Jersey passed legislation allowing shareholders in pass-through entities to elect to have the entity pay the income tax on their distributive share of income, rather than paying it at the partner level. This election becomes effective for tax years beginning on or after January 1, 2020.

The election is available to both individual and corporate partners and must be elected each year by the partner, or if the organizational documents allow, by an officer or member, provided that person or entity is authorized to elect for all members. The election will be made annually on forms to be prescribed by the Department of Taxation.

The tax imposed on a pass-through entity will be equal to each member’s share of distributive proceeds attributable to the pass-through entity for the tax year, multiplied by:

  1. 5.675%, if the distributive proceeds of the pass-through entity are not greater than $250,000 in the tax year;
  2. $14,152 plus 6.52% of the excess over $250,000 if the distributive proceeds of the pass-through entity are not greater than $1 million, but greater than or equal to $250,000, in the tax year;
  3. $63,087.50 plus 9.12% of the excess over $1 million if the distributive proceeds of the pass-through entity are not greater than $5 million, but greater than or equal to $1 million in the tax year; or
  4. $427,887.50 plus 10.9%, if the distributive proceeds of the pass-through entity are greater than or equal to $5 million in the tax year.

The pass-through entity’s tax return will be due on the 15th day of the third month after the close of the tax year, and estimated tax payments will be required on the 15th day of the fourth, sixth, and ninth months of the tax year and on or before the 15th day of the first month of the succeeding tax year.

Non-corporate members will receive a credit equal to the member pro-rata share of the tax paid by the pass-through entity. A refund will be allowed if the credit exceeds the tax due for the year. Corporate members will be allowed a credit against the corporation’s business tax, but the credit may not reduce the tax liability below the statutory minimum tax. Any excess credits are available for a 20-year carry-over period.

A resident taxpayer will be allowed a credit against gross income tax for any tax that the Department of Taxation determines is substantially similar to the New Jersey tax and is imposed by another state of the United States, political subdivision of a state, or the District of Columbia. The credit may not exceed the tax that would have been due if the income was taxed by New Jersey at the individual level and not taxed at the entity level.

For questions as to how this update affects your New Jersey filing requirement, or for any other tax matter, please contact your Marcum State and Local Tax professional.