What Do We Know About the Pass-Through Business Alternative Income Tax?

What Do We Know About the Pass-Through Business Alternative Income Tax?

NJ Pass-Through Business Alternative Income Tax Act (BAIT)

written by Anna Gregory

On January 13, 2020, Governor Phil Murphy signed S. 3246 into law. The new law is referred to as the “Pass-Through Business Alternative Income Tax Act” or “BAIT” Act. This law was passed in response to the Federal tax reform enacted in December 2017 which placed a $10,000 limitation on the itemized deduction for state and local taxes paid (“SALT”). New Jersey is one of several states initiating workarounds to the Federal “SALT” limitations by creating the state entity level tax on pass-through entities (“PTE”) and a corresponding state tax credit for its members.

Eligibility

Effective for taxable years beginning on or after January 1, 2020, a PTE with at least one member who is liable for New Jersey gross income tax may elect to be liable for, and pay, the BAIT in a tax year. Eligible PTE’s include partnerships, S corporations, and limited liability companies (LLCs) classified as partnerships or S Corporations. LLCs owned by Sole proprietors (SMLLCs) and qualified joint ventures are not eligible.

Election

To make the election, each member of the PTE must consent at the time the election is filed. Alternatively, the election can be made by any officer, manager, or member who is authorized to make the election on behalf of the PTE.

Electing PTE’s must file a BAIT tax return and pay the entity level income tax balance due, after application of all estimated payments, by the 15 day of the third month following the end of their tax year, or March 15 for calendar-year taxpayers. Estimated payments must be made by the 15 day of the fourth month, sixth month, and ninth month of the taxable year, and by the 15 day of the first month following the close of the tax year.

Tax Rates

The BAIT is imposed on a tax base that is equal to the sum of each member’s share of the PTE’s “distributive proceeds” attributable to the PTE for the tax year. “Distributive proceeds” are defined as the net income, dividends, royalties, interest, rents, guaranteed payments, and gains of the PTE derived from or connected with sources within New Jersey upon which the New Jersey gross income tax would be imposed if the PTE were an individual taxpayer.

For tax years beginning on or after January 1, 2020, the four tiers of income tax rates are as follows:

  • 5.675 percent for distributive proceeds under $250,000
  • $14,187.50, plus 6.52 percent for distributive proceeds between $250,000 and $1,000,000
  • $63,087.50, plus 9.12 percent for distributive proceeds between $1,000,000 and $5,000,000
  • $427,887.50, plus 10.9 percent for distributive proceeds over $5,000,000

Credits for Individual/Trust/Estate Members

Non-corporate members of a PTE making the BAIT election are allowed a refundable New Jersey gross income tax credit equal to their pro rata share of the BAIT tax paid by the PTE. The credit is applied against the gross income tax liability of the member in that tax year after all other credits available to the member have been applied. Any excess credit is treated as an overpayment, but without the accrual of interest. The credit allowed to a trust or estate can be allocated to beneficiaries, or it can be used against the gross income tax liability of the estate or trust.

Credits for Corporate Members

A corporation that owns an interest in a PTE making the BAIT election is allowed a credit against both the CBT and the temporary surtax. The amount of the credit equals the corporate member’s pro rata share of the BAIT tax paid by the PTE and applies to the corporate member’s CBT or surtax liability in that same tax year. The credit cannot reduce the corporation’s tax liability below the statutory minimum tax and any excess credit can be carried forward for up to 20 years.