The New Jersey elective pass-through entity (“PTE”) tax, known as the Business Alternative Income Tax (“BAIT”) was enacted as a workaround for the federal limitation on the state and local tax (“SALT”) deduction. On January 18, 2022, Governor Phil Murphy signed into law New Jersey Senate Bill 4068, which rectifies implementation issues and cures inconsistencies of the New Jersey BAIT. The law includes the following changes which are generally effective January 1, 2022:
- Updating the BAIT tax brackets to more closely align with the gross income tax brackets. BAIT income in excess of $1 million is now subject to the top tax rate of 10.9%. Previously the 10.9% bracket only applied to income in excess of $5 million and a 9.12% tax rate applied to income between $1 million and $5 million.
- Modifying the tax base for PTEs classified as partnerships to now include 100% of the distributive share of income of New Jersey residents and the distributive share of New Jersey-sourced income of nonresidents. Previously, the Division of Taxation limited the calculation of the BAIT to New Jersey apportioned income for all partners regardless of residency status.
- Clarifying that all PTEs are permitted to use a three-factor apportionment formula for allocating income to New Jersey. For tax year 2021, the Division of Taxation has confirmed S corporations may choose to use a three-factor formula on Form NJ-NR-A for purposes of the BAIT.
- Allowing PTE BAIT overpayments and excess credits at the entity level to be carried forward and applied to a BAIT liability in the successive year or refunded. The state previously required the overpayment to be refunded.
- Clarifying that the BAIT credits for each partner/shareholder of an electing PTE is equal to the member’s direct share of the BAIT paid.
- Eliminating the requirement for a partnership to remit nonresident withholding tax if the taxpayer reasonably expects the payment of withholding would be refunded due to the partnership’s BAIT payments. This eliminates the double payments that were a deterrent to taxpayers electing the BAIT.
Please contact your Mazars professional for additional information.
Authors
Harold Hecht, Managing Director
Kevin Melson, Manager
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.