New Jersey Passes Bill to Correct Issues Arising from the Implementation of the NJ Business Alternative Income Tax
On January 18, 2022, Governor Phil Murphy signed Senate Bill (S.B.) 4068 to revise the elective pass-through entity (PTE) Business Alternative Income Tax (BAIT). The new legislation clarifies and alters some of the key components of the BAIT, including how to calculate the tax, availability and utilization of credits by PTE owners, and the applicable tax rates for the top bracket of the BAIT. The new legislation is effective January 1, 2022.
New Jersey Business Alternative Income Tax-Issues Overview and Changes
The new calculation includes more income that is subject to the tax, thereby allowing for a larger BAIT to be paid, resulting in a larger credit for PTE owners. This new method of calculating the BAIT mirrors the structure of neighboring New York State’s Pass-Through Entity tax regime with regard to the treatment of partnerships (including LLCs treated as partnerships) and electing S corporations.
The new rules are intended to bring the BAIT closer in line with how PTE owners would normally calculate their income on their personal returns. Now, any taxes paid under the BAIT will actually be closer to the true liability on an individual’s returns, and the resulting credit will more closely offset the calculated liability.
TAX BRACKET CHANGES
The new BAIT tax rates align with changes to the state’s gross income tax brackets, wherein income over $1 million will now be subject to tax of “$63,087.50 plus 10.9% of the excess over $1,000,000.00.” The last bracket for income over $5 million has been eliminated.
CREDIT STRUCTURE AND UTILIZATION
The new credit structure first allows a credit to each member of an electing PTE, equal to the member’s “direct share of the tax paid.” Even more so, the biggest change to the allowable credits for a member of an electing PTE is the ability of the PTE to pass along the credit to its non-individual members. In the case of an S corporation, the credit can be allocated among the shareholders of the S corporation, while a partnership can allocate the credit received among the partners of the partnership.
In addition, the PTE can still use the credit to offset its own tax liability. The PTE can use the credit and apply it towards its own liability resulting from the annual tax; fees pursuant to requirements concerning returns, notices, records and statements; or the tax liability from the BAIT itself.
The legislation also removes the requirement for non-resident withholding on partner income, where the non-resident taxpayer reasonably expects to receive a credit that would cover the required withholding amount.
PERSPECTIVES AND ADDITIONAL UPDATES
- The new law is effective January 1, 2022.
- A pass-through entity that overpays tax in one taxable year shall be allowed to apply the overpayment of tax to the subsequent taxable year’s estimated entity tax payments.
- A partnership is not required to make an allocation payment on behalf of nonresident corporate and nonresident non-corporate partners if the nonresident reasonably expects to be refunded the payment on account of a tax credit pursuant to the New Jersey gross income tax.
- The new BAIT calculation allows for greater credits that will more closely align with a member’s gross income tax position.
- For the 2021 Tax Year, an S corporation will have the option to use the three-factor apportionment formula on the NJ-NR-A for purposes of the BAIT.