Client Alerts
January232020
SALT Cap Workaround – NJ Enacts Pass-Through Business Alternative Income Tax Act

Wayne K. Berkowitz, CPA, J.D., LL.M.

1.23.20 | Client Alert

On January 13, 2020, New Jersey Governor Phil Murphy signed into law the Pass-Through Business Alternative Income Tax Act. The new law, which applies to tax years beginning on or after January 1, 2020, establishes an elective entity level tax.

The law’s purpose is to provide taxpayers subject to the New Jersey Gross Income Tax (GIT) a method to limit the impact of the federal Tax Cuts and Jobs Act (TCJA) $10,000 cap on the state and local tax deduction. The Garden State joins Connecticut, Wisconsin, Oklahoma, Louisiana, and Rhode Island who have enacted similar legislation.

Upon election, pass-through businesses would be subject to tax on the distributive proceeds attributable to New Jersey sources at the following rate schedule:

Not over $250,0005.675%
$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 owners of the pass-through entity receive a dollar-for-dollar GIT credit on their pro-rata share of the tax paid by the pass-through entity. Corporate members receive a similar credit against their corporate business tax liability.

The election is annual and made at the entity level on or before the due date of the entity return. All members must consent or if authorized, a manager, member or officer may also consent. As regulations or other guidance has not yet been issued, it is unclear if the election must be made by the original or extended due date of the return.

Uncertainty Emerges

While the New Jersey statute makes clear that for its GIT it will allow the resident tax credit for similar entity level taxes enacted by other states, much uncertainty remains for other jurisdictions’ resident credit.

Example

If a New York State resident taxpayer was a member of a New Jersey partnership that elected to pay the entity tax, there is currently no formal guidance as to whether the NYS resident will be permitted to utilize his or her pro-rata share of the NJ entity tax to offset the NY resident tax liability.

Additionally, while the IRS has recently issued regulations effectively eliminating other types of SALT limit workarounds, it has yet to address the deductibility of state entity level taxes, particularly elective ones.

We will monitor how this new law plays out and what, if any, challenges arise in this ongoing struggle with the SALT cap.

Questions? Contact Wayne K. Berkowitz at 212.331.7465 | wberkowitz@berdonllp.com or reach out to your Berdon tax advisor.

Berdon LLP New York Accountants

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