Effective for tax years beginning 2020, the New Jersey Business Alternative Income Tax (“BAIT”), is an elective entity-level tax on pass-through businesses. The BAIT provides a workaround to the Federal limitation for the state tax deductions.
While there are a number of implications businesses should consider, the following businesses that meet these three conditions should assess the New Jersey BAIT as part of their year-end tax planning:
The TCJA imposed a $10,000 limitation on the amount of state and local tax (“SALT”) that individuals (or pass-through business owners) may deduct for federal income tax. Some states, including New Jersey, responded by enacting various workaround bills in an effort to mitigate the impact of the limitation on their state residents.
Businesses that meet all three conditions should prioritize planning today in preparing for year-end tax planning. As there are many technicalities with the legislation, it is important for businesses to analyze whether making the election would yield in a lower tax burden. Proactive analysis and planning is vital as not all businesses may benefit from the election, with potentially unfavorable consequences.
By passing through a net amount of income reduced by the SALT deduction, the owner is able to fully deduct their New Jersey taxes for federal purposes.
Consider the following simplified example:
S corporation (S) has net income of $1,000,000 in 2020, and one individual shareholder (A). Absent the election, S would pass through to A $1,000,000 of net income and A would pay NJ income tax of approximately $60,000. Most of this payment, or $50,000, would not be deductible at the Federal level because of the SALT limit. Alternatively, if S elects the BAIT to pay tax at the entity level, it would hypothetically be able to deduct the full $60,000 for federal purposes. Assuming a 37% tax rate for federal purposes, this could be equated as much as $22,200 of tax savings.
The potential benefits along with the risks need to be weighed in determining the right course of action. Some of these considerations may include:
Withum’s SALT team can discuss and help you analyze if the BAIT election makes sense for your business. Although we are still in the process of understanding all of the nuances of the tax and awaiting the State to draft guidance on the new law, it is important for businesses to consider any planning in respect to the BAIT election for the 2020 tax returns. With quarterly estimates for business owners coming due on September 15, the time to plan is now.
 The simplified calculation uses various assumptions and rounded tax rates for illustration purposes. Reach out to Withum SALT to explore specifics in modeling any potential tax savings.