Pass-Through Business Alternative Income Tax Act
On January 13th, 2020, New Jersey joined Connecticut, Louisiana, Oklahoma, Rhode Island, and Wisconsin in establishing a new tax for pass-through entities. This act, called the “Pass-Through Business Alternative Income Tax Act”, provides for a voluntary tax available to S Corporations, Partnerships, and LLCs taxed as partnerships. It was created in an effort to work around the federal cap on an individual’s state and local income tax deductions.
For tax years beginning on or after January 1st, 2020, pass-through entities with at least one member subject to the New Jersey income tax may elect to pay this alternative income tax. The entity is taxed on the sum of each of the member’s share of distributive proceeds, and the members may then claim a tax credit for the amount paid on each of their individual shares. The advantage of this election is that the entity receives a federal deduction, while each member still receives a dollar for dollar credit on their personal returns. In other words, business entities are not subject to the $10,000 state and local income tax limitation set in place for individuals. The pass-through entity tax essentially converts the nondeductible New Jersey individual taxes into deductible business taxes. This allows a tax credit for New Jersey individual taxes that has no limitation.
An election for this tax must be made by the entity on or before the due date of the entity’s return, and may not be made retroactively. It is only available if each member consents, or if the election is made by a manager or a high-level member who is authorized to make such decisions. The alternative income tax rate is based on the sum of each member’s share of distributive proceeds for the year, multiplied by the following:
5.675% for the first $250,000 of income
6.52% for income between $250,000 and $1 million
9.12% for income between $1 million and $5 million
10.9% for income exceeding $5 million.
To illustrate, Josh is the sole owner of an S Corporation that operates exclusively in New Jersey. The S Corporation has net income of $100,000, and, if elected, their alternative income tax would be $100,000 x 5.675% = $5,675. Josh’s 100% share of the tax paid would be reported on his K-1 issued from the entity, and Josh could then use this tax credit to offset his personal New Jersey tax liability.
Pass-through entities that file an election to pay this tax must file form PTE-100, as well as provide schedule PTE-K-1 to each member. The entity’s return is due on the 15th day of the third month after the tax year end (March 15th for calendar-year filers). The entity may request a 6 month extension by filing form PTE-200-T, as long as it has paid 80% of its current-year tax. Estimated tax payments are due on or before the 15th of each of the fourth, sixth, and ninth month of the tax year, and the first month after the close of the tax year.
Contact SRG’s tax professionals at 201-525-1222 to discuss the Pass-Through Business Alternative Income Tax and see if this option makes sense for you.