Last January, New Jersey Governor Phil Murphy signed into law NJ SB3246, the “Pass-Through Business Alternative Income Tax Act,” making 2020 the first year the Pass-Through Business Alternative Income Tax is able to be applied. With this legislation, the Garden State joined several other states in enacting some variation of an entity-level tax on pass-through entities (“PTEs”) in order to work around the $10,000 federal cap on individuals’ itemized deductions for state income taxes. The other states include Connecticut, Louisiana, Oklahoma, Rhode Island and Wisconsin.
So what does it mean?
The recent law allows pass-through entities to elect to pay tax due on the owner’s share of distributive proceeds. The owner(s) may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.
Who does this apply to?
Pass-through entities included under this law are:
- federal S corporations that have made the New Jersey S corporation election; and
- Limited liability companies (LLCs).
Single member limited liability companies and sole proprietorships are not eligible to pay the pass-through tax. For an entity to be eligible, they must have at least one member who is liable for tax on their share of distributive proceeds.
Corporate partners are permitted to take the tax credit against the New Jersey surtax, as well as their corporate business tax liability. However, the credit cannot reduce the corporate partner’s liability below the minimum tax. Any excess credits can be carried forward for 20 tax years. If a corporate partner is tax exempt, their pro rata share of the PTE tax shall be refunded.
The tax paid by the entity is based on the sum of each partners’ “distributive proceeds” as follows (in this article, the term “partner” includes a shareholder in an S corporation):
- First $250,000 – 5.675%
- $250,001 – $1 million – $14,187.50 + 6.52% of the excess over $250,000
- $1,000,001 – $5 million – $63,087.50 + 9.12% of the excess over $1 million
- Over $5 million – $427,887.50 + 10.9% of the excess over $5 million.
The partners can claim a refundable credit for their pro rata share of the tax paid on their personal 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; i.e. March 15. Estimated tax payments are due on April 15, June 15, and September 15 of the tax year and on or before January 15 of the succeeding tax year.
Could I be penalized for incorrectly filing?
Since 2020 is the first year the Pass-Through Business Alternative Income Tax is available, taxpayers will not be penalized under the safe harbor provisions in N.J.S.A. 54A:9-6 for the failure to file or make estimated payments this year.