Going the extra mile for a client!
In 2020 NJ passed a new tax to skirt around the State & Local Tax (SALT) deduction limitations enacted in 2017 by Congress. It is called the NJ Business Alternative Income Tax (BAIT). The law creates a “corporate” type tax on NJ S Corporations & Partnerships that shareholders/partners can elect into.
Why elect into the tax?
Any tax the entity pays is deductible for Federal tax purposes without any limitations. Additionally , NJ was allowing the shareholder/partner an equivalent credit on their personal income tax returns for their share of the amount paid by the entity. We started planning & telling our clients who owned businesses in NJ to register & pay the tax in 2020 in order to get the federal deduction. However, I heard that non resident owners might get hurt if they elected to pay the BAIT. I had several clients with 6 figure tax savings if they elected, so that I had to dig deeper. I spoke with peers & attorneys and they told me that there was a chance that NY would not recognize the BAIT tax paid as being paid by the taxpayer. This would have resulted in the entity paying a tax to NJ and the individual paying a similar tax on the same amount to NY. (Usually NY would credit a resident taxpayer for any taxes paid to NJ so that a tax is only paid once to a State). I couldn’t understand why NY who also got hurt by the Federal SALT deduction limitation rules would not allow a credit in this instance as it should make no difference to them who pays the tax to NJ as long as a tax was paid! I decided to call the NY Tax Counsel who usually rules on tax issues. I spoke with a person who stated that according to the instructions on the NY Credit Form only taxes due & paid by the taxpayer will be counted towards the credit. I asked why and got a little insight into their thoughts (which I still disagree with). Unfortunately, this time I had to get back to the clients with the bad news that they couldn’t take the deduction, but that maybe in the next few years the States will coordinate their efforts & allow BAIT type taxes as credits on individual returns. Though this ended in an unfavorable treatment to the taxpayers, they appreciated that I went the extra mile digging into the issue & of course had they paid the BAIT tax they would have had to pay the same tax again to NY.