Take the BAIT – Why NJ Business Owners Should Reconsider the Business Alternative Income Tax

Original publish date: January 2022/Updated: March 2023

New Jersey business owners who have not previously taken advantage of the NJ BAIT, may want to reconsider making a NJ BAIT election for the 2023 tax year. In January 2022, Governor Murphy signed into law a bipartisan bill (S4068) that enhanced the state’s electable pass-through entity (PTE) tax. The BAIT legislation along with other administrative fixes, remedies a number of implementation issues with the originally enacted BAIT statute that impeded many business owners from making the election.

Since the BAIT was originally enacted in 2020, many changes have taken place over the past few years. This includes changes in how the BAIT is computed, subjecting more income to the BAIT tax for resident owners, thereby allowing a larger SALT workaround benefit for certain business structures.


As we have previously discussed on PTE taxes, a PTE tax allows for business owners to sidestep the limitation on the amount of state and local tax (“SALT”) that individuals may deduct for federal income tax in order to mitigate the impact of the TCJA SALT limitation.

The BAIT applies to tax years beginning on or after January 1, 2020, and permits pass-through entities (i.e. partnerships, New Jersey S corporations, and Limited Liability Companies) to pay tax at the entity level based on New Jersey sourced income. In exchange of the BAIT entity paid tax, owners receive a corresponding pro rata share of a BAIT credit.

Below are some of the more recent changes to BAIT that may make New Jersey business owners reconsider their hesitancy with making an election.

1. Increased Opportunity for Deductions

The Issue: Previous law only covered New Jersey-sourced income which limited the amount of credit available to New Jersey resident partners.

The Change: The new law expands the PTE tax base to all income allocated to New Jersey resident partners, regardless of source, while maintaining only New Jersey-source income allocated to nonresident partners. This fix will allow resident partners or members of an LLC to claim a larger SALT deduction on business income sourced from other states.

However, this fix only applies to partnerships and multi-member LLCs. S corporation shareholders will still be limited to income allocated to New Jersey.

2. Tiered PTE Passthrough Credit

The Issue: Multi-tiered partnerships may have not elected NJ BAIT because of fear that the credit would get stuck at the lower tiered entities and not pass through to the ultimate taxpayer.

The Change: The new law would permit partnerships and S corporations to allocate PTE tax credits to their partners and shareholders when those entities are themselves partners/members of an electing PTE. Additionally, the lower tiered entities may elect to apply the PTE against their own PTE taxes such as nonresident withholding, minimum taxes and filing fees or apply overpayments of the PTE tax against following year estimated payments.

3. Elimination of Nonresident Withholding

The Issue: Previous law required PTEs to pay both the NJ BAIT and nonresident withholding tax. This timing difference made it difficult for some taxpayers to make the election especially if they file their returns in October.

The Change: The new law allows partnerships to refrain from withholding on nonresident partners if the partner expects to receive a refund resulting from the PTE tax credit. This fix eliminates the duplicate estimate requirement and makes NJ BAIT more attractive.

Contact Us

If you like to discuss how this New Jersey BAIT legislation may impact you, then contact Withum’s State and Local Tax Services Team for a deeper discussion.