New Jersey Governor signs bill to provide SALT cap workaround

On January 13, New Jersey Governor Phil Murphy signed a bill (S-3246/A-4807) to provide small businesses and other passthrough entities with a workaround for the $10,000 cap on the state and local tax (SALT) deduction implemented by the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Under the Pass-Through Business Alternative Income Tax Act, flow-through entities in New Jersey may elect to pay income taxes directly at the entity level as a business tax instead of passing through the income tax liability to the individual partners or shareholders.  Individuals and corporate owners of electing entities must still report their distributive share of the entity’s income on their New Jersey tax returns.  Individuals are entitled to claim a refundable credit against their New Jersey Gross Income Tax liability for their share of the entity-level tax.  Corporate partners/members will also claim a credit against their Corporation Business Tax, but any credits passed through to them are not refundable.  However, the law provides corporate taxpayers with a 20-year carryover of any overpayment.

This legislation provides a workaround for the $10,000 SALT cap by shifting the tax liability from the individual partners and shareholders to the business entity, since the TCJA caps the SALT deduction only for individuals.  The bill is effective for taxable years of pass-through entities beginning on or after January 1, 2020, including subchapter-S corporations, LLCs, and partnerships.

New Jersey follows at the heels of Wisconsin and Connecticut, which already have similar tax provisions for pass through entities.  The burning question, as some states rush to enact workarounds around the SALT cap, is how the Internal Revenue Service will react.  As of now, the IRS has been silent regarding the pass-through entity tax workaround, only challenging other types.

Mazars Insight

Certain aspects of the entity level tax such as how to make the election and how to remit payments are not yet known. The Division of Taxation is expected to issue guidance with respect to the rollout of the pass-through entity tax.

Please contact your Mazars USA LLP professional for additional information.

Published on: January 17, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.