If you live in New Jersey, then you know we are among the highest taxed states in the nation – and there’s no sign of that changing in the near future. Fortunately, however, there are various tax situations that you can take advantage of if you happen to be a pass-through entity (PTE) owner. As of January 2020, NJ has signed into law the NJ BAIT tax, or Business Alternative Income Tax (BAIT),
How it Works:
Partnerships, S corporations, and LLCs – can elect to pay an entity-level tax. In return, a proportionate share of the BAIT paid is credited to the Business or Pass-Through Entity (PTE) partners’, members’ or shareholders’ Gross Income Tax or Corporation Business Tax liability. Ultimately, electing into the BAIT provides the eligible owner(s) an opportunity to reduce their respective federal income by the full amount of BAIT paid by the PTE because such amount is deducted from the owners’ taxable distributive share from the PTE.
It’s important to note that Single-member LLC and sole proprietorships may not elect to pay the Pass-Through Business Alternative Income Tax.
According to the NJ Treasury, “for taxable years beginning on or after January 1, 2020, pass-through entities may elect to pay a Pass-Through Business Alternative Income Tax due on the sum of each of the member’s share of distributive proceeds. The member(s) may then claim a tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds”.
The term “distributive proceeds” refers to the net income, dividends, interest, royalties, rents, guaranteed payments, and gains of a pass-through entity, derived from or connected with sources within New Jersey.
Per the law, the election must be made on a yearly basis by ALL owners of the pass-through entity, or by a legally or organizationally designated officer or member with the authority to make the election for all members. This annual election is to be made on or before the original due date of the business’s tax return. The pass-through entity’s tax return is due on the 15th day of the third month after the close of the tax year.
While this may sound complicated, it is quite typical that the state would permit a credit on your personal tax filing for business income taxes paid in order to avoid double taxation. Since the NJ BAIT tax is being paid by the pass-through entity, the state will interpret and apply the principles of this type of entity tax and the corresponding credit that would have been available if the tax was paid by the individual owner differently. Therefore, making the BAIT elective permits planning to maximize the potential benefits and avoid the pitfalls of increased taxes.
Therefore, when you make the BAIT election, the NJ business owner’s individual tax return applies a 100% credit for the business taxes paid against their NJ income taxes to avoid processing a tax on the same income in the state two times.
BAIT is a perfect example of a tax law that can only be taken advantage of with appropriate tax planning and staying “in the know”. Business owners who fall into the qualified categories should reach out to their trusted advisor or accountant in order to learn more and find out if BAIT applies to them.
At BSM, we’ve been helping our clients take advantage of the new tax law.. And we can help you too! Give us a call at 973-478-4846 or book a call at your own convenience with one of our experts!