NJ BAIT Deduction

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By Christian Limato

If you are a business owner preparing for your taxes, wait! You may be able to save thousands of dollars this year with the New Jersey Business Alternative Income Tax that was revised in 2022.

What is the NJ BAIT?

The New Jersey elective pass-through entity (PTE) tax, known as the Business Alternative Income Tax, or NJ BAIT, became effective for tax years beginning on or after January 1, 2020, but was revised on Jan 18, 2022, with the changes placed into effect for January 1, 2022.  What does this mean for the average business owner?

When the Tax Cuts and Job Act (TCJA) was proposed it presented issues for business owners classified as Pass-Through Entities, to try and mitigate. 

Pass-through entities include:

  • Partnerships
  • Federal S corporations that have made the New Jersey S corporation election
  • Limited Liability companies (LLC)

The TCJA limited deductions for state and local taxes and eliminated the federal tax deduction for state taxes on the profit of businesses on an individual’s tax return. NJ BAIT will help business owners mitigate negative impacts from the federal, state and local tax (SALT) deduction cap, by allowing the PTE to make an annual election to be taxed at the entity level. This allows taxes to be paid on the income of the PTE that would otherwise have been disallowed at the individual level. Owners will receive a refundable credit to apply against their personal taxes which eliminates any potential double taxation. The NJ BAIT program is estimated to save business owners $100 to $500 million annually.

The revised version of the NJ BAIT will utilize the New Jersey source income rather than the federal taxable income to calculate the NJ BAIT. New Jersey source income includes all individual and corporate taxes based exclusively in New Jersey. The NJ BAIT 2022 will also allow partnerships that make payments to apply those payments to upper-tier non-individual entities. Overpayment of the BAIT taxes by pass-through entities can be applied to future estimated taxes or be refunded, depending on preference. Now that we know what the NJ BAIT is and how it is applied, what businesses qualify?

NJ BAIT Business Qualifications 

The NJ BAIT has brackets for businesses to fall into, depending on their distributable income. If there is more than one member with shares of distributable income, then the sum of each member’s share of distributive income will be used. Members are those who are liable for tax on distributable income. This will be clarified below. The tax brackets for New Jersey are as follows:


Sum of Each Members Share of Distributive Proceeds
Tax rate
First $250,0005.675%
Amount over $250,000 but not over $1 million ($14,187.50 plus 6.52% of excess over $250,000)6.52%
Amount over 1 million ($63,087 plus 9.12% of excess over $1 million)10.9%

A BAIT Tax Example Calculation 

As mentioned above the NJ BAIT calculation will be made based on the sum of all the member shares of distributive proceeds. We will now walk through an example to help understand the calculation of tax due.

Let’s say that you own a business that has 3 members with shares of distributive income sourced in New Jersey. You and Member B are residents of New Jersey, and Member A is a non-resident. Member A has $350,000 distributive income, Member B has $250,000, and you have $500,000 of distributive income. The first step would be to calculate the sum of all three members’ distributive income, in this case $1.1 million. Before moving forward, it is crucial to make sure that no member’s share of distributive income is left out in order to properly calculate the tax due to each member.

Now that the sum of distributive income is calculated we can use the bracket above to determine what tax rate will be used. In this instance, the tax rate we will be using is the highest tax bracket. 

The distributive income to be taxed is $1,100,000 and the tax rate is 10.9%. The calculation is as follows:

The distributive income, $1,100,000, is reduced by $1,000,000 shown in the table above to obtain the excess. If a negative number is shown then chances are the wrong bracket is being used. After calculating the excess distributive income, we multiply by the tax rate, 10.9%, and get $10,900. Finally, we add the $63,087 base to the $10,900 tax to obtain the elective entity tax.

$63,087 +$10,900 [($1,100,000 – 1,000,000) = $100,000 x 10.9% = $10,900] = $73,987

From this calculation we can see that our elective entity tax is $73,987 for the collective 3 members. To allocate elective entity tax to each member, we will divide their individual distributive incomes by the total distributive incomes:

You: ($500,000/1,100,000 x $73,987) = $33,630.45

Member A: ($350,000/1,100,000 x $73,987) = $23,541.31

Member B: ($250,000/1,100,000 x $73,987) = $16,815.23

$33.630.45 + $23,541.31 + $16,815.23 = $73,986.98

Now that we know how much our elective entity tax is, let’s pay it.

Making Payments

All payments for the elective entity tax must be made electronically on or before the specified dates, or on the next business day after the specified date if the due date is on a weekend. Each business must register with New Jersey Division of Revenue and Enterprise Services and submit an election form to make payments and returns.

For registration: State of New Jersey Online Tax/Employer Registration (njportal.com) 

To make the election: NJ Pass-Through Business Alternative Income Tax (PTE) Login (state.nj.us)

After registering and electing, the payment due dates are as follows:

Schedule for Calendar Year 
Quarter 1April 15
Quarter 2June 15
Quarter 3September 15
Quarter 4January 15 (Of the following tax year)

*Payments can be made on or before the due date. 

Frequently Asked Questions

What if a non-resident possesses shares of distributable income sourced in New Jersey? 

This is not an issue. If the non-resident’s shares of distributive income being used for the calculation is sourced in New Jersey the calculation will proceed as stated above. 

Is a resident taxpayer allowed to obtain credit for the Connecticut and New York pass-through entity tax?

Yes. Resident taxpayers are allowed to take credit for Connecticut and New York pass-through entity tax against their gross income tax liability.

The NJ BAIT process can be complex, and we do not recommend taxpayers making this election without first consulting their accounting professional. If you have any questions about your tax situation or our tax services, please do not hesitate to contact us.

Qualified Business Income (QBI) Deduction: Section 199A

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Back in 2019, we gave an in-depth look at the section 199A qualified business income deduction. Now that we are in the year 2022 it would be a good chance to look at what has changed since then. If you haven’t already read our previous article, we urge you to read it before continuing by clicking the link here.

What is qualified business income?

Qualified business income (QBI) is the total amount of a pass-through entity or sole proprietor’s taxable income sourced within the United States. This applies to all income except for items such as the following:

  • Employee wages or salaries
  • Nontaxable income, like municipal bond interest
  • Capital gains (losses)
  • Investment income, such as capital gains or losses, or dividends
  • Income from foreign sources
  • Publicly traded partnership (PTP) income
  • Interest income not allocable to a trade or business

It is important to note that any business income not sourced within the United States does not qualify as QBI. 

What is the QBI deduction?

The QBI deduction is a deduction for tax years beginning after December 31, 2017. The deduction allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends as well as their qualified publicly traded partnership (PTP) income. The deduction is available to taxpayers whether they itemize deductions or take the standard deduction. 

Who qualifies for the QBI Deduction?

Pass-through entities (PTE) such as sole proprietorships, partnerships, LLCs, or S corporations are eligible for a QBI deduction, provided they are within the income thresholds. The table below shows the 2022 QBI deduction taxable income thresholds:

Filing StatusIncome threshold (Full deduction)Income threshold (Partial deduction)
Single$164,900$214,900
Head of Household (HOH)$164,900$214,900
Married Filing Jointly (MFJ)$329,800$429,800
Married Filing Separately (MFS)$164,925$214,925
Married nonresident alien$164,900$214,900

If you exceed the income threshold, you are no longer able to obtain the full deduction, and your maximum deduction will be decreased until you no longer qualify. In the case of a specified service trade or business (SSTB), you will not qualify for a deduction if you surpass the income threshold above. SSTBs include the following:

  • Accounting
  • Actuarial science
  • Athletics
  • Consulting
  • Health
  • Investing and investment management
  • Law
  • Performing arts
  • Dealing in securities, partnership interest, or commodities
  • Any business whose principal asset is the reputation or skill of one or more of its employees or owners

If you have further questions regarding your business’s status as an SSTB, please reach out to us.

How is the deduction claimed?

For tax years 2019 and after, Form 8995 or 8995-A are used to report all QBI deductions. This form must be attached to the taxpayer’s return upon submission. On this form the taxpayer must report the name of their trade, business, or aggregation and all identifying information, as well as the total qualified business income of your business. This form acts as a worksheet to compute your QBI deduction. 

How is the deduction calculated?

Calculating the QBI deduction is the same as in previous years it was available. If your taxable income is less than the income threshold above for your filing status, and you are a pass-through entity, you can claim up to the full deduction. For example, if you own a sole proprietorship, your filing status was unmarried filing jointly, you had $150,000 of taxable income before deductions, and $120,000 of taxable income after deductions, you would be able to claim the full deduction since you did not exceed the threshold. You would multiply the lesser of the two values, in this case $120,000, by 20%. Your QBI deduction is $24,000.

If the taxable income of your business exceeded the threshold listed above, your qualified business income from an eligible business will be limited to the lesser of:

  1. 20% of the taxpayer’s qualified business income with respect to a qualified trade or business, and
  2. The greater of
    1. 50% of the W-2 wages with respect to the qualified trade or business, and 
    2. The sum of 25% of the W-2 wages with respect to the trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

If you need any assistance with qualified business income deduction, please don’t hesitate to reach out to us at Lear & Pannepacker. You may be able to save thousands of dollars this tax season.

Tax Law Changes for 2021

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By: Cassandra Bartole 

With a brand new year comes brand new changes to the tax code, we want to take this opportunity to inform you of the tax law changes you should expect to see. Below we highlight some of the most important changes that you should be aware of when you file in 2022.  

Child Tax Credit

For the tax year 2021, there have been some changes to the Child Tax Credit. In 2020 the child tax credit was $2,000 per child 16 years old or younger, but for 2021 it has increased to $3,000 for most children and $3,600 for children 5 years of age and under. For single filers the phase out begins to phase out if their adjusted gross income is above $75,000, $112,500 for head-of-household filers, and $150,000 for married filing joint filers. Another change to this credit for 2021 is that it is fully refundable. 

Recovery Rebate Credit

Many people were happy to learn that the American Rescue Plan authorized a third round of stimulus checks. The amount of the third round of stimulus checks were for $1,400, plus an additional $1,400 for each dependent in the family. However, there was a phase out. The phase out for married filing jointly is adjusted gross income above $150,000, $112,500 for head-of-household, and $75,000 for single filers. For people that were eligible for the third-round of stimulus checks but did not receive them or got less than they should have, there may be relief available in the 2021 tax credit known as the recovery rebate credit. 

Retirement Plans

The required minimum distributions are back for 2021. In 2020 seniors were able to skip their required minimum distributions without having to pay a penalty, but for 2021 anyone who is at least 72 years of age by the end of the year is required to take the required minimum distribution for 2021. 

Earned Income Tax Credit

For 2021, more people who work without qualifying children will be able to claim the earned income tax credit. The maximum credit has increased from $543 to $1,502 for 2021 for childless workers.  Those without a qualifying child must be between 25-65 years of age at the end of the year, live within the United States, and cannot be claimed as a dependent by another taxpayer. 

Long Term Capital Gain Rates

The long term capital gain rates and qualified dividends have not changed for 2021. The 0% rate applies for individual taxpayers with income up to $40,400 on single returns which was $40,000 in 2020, $54,100 for head-of-household which was $53,600 for 2020, and $501,601 for married filing joint returns which was $496,601 for 2020. The 20% rate applies for individual taxpayers with income up to $445,851 on single returns which was $441,451 in 2020, $473,751 for head-of-household which was $469,051 for 2020, and $501,601 for married filing joint returns which was $496,601 for 2020. The 15% rate is for anyone one between the 0% and 20% break points.

Standard Deduction

For 2021, there is an increase in all standard deductions. Married filing jointly filers now receive a $25,100 standard deduction, up from $24,800 in 2020, plus $1,350 for each spouse 65 years of age or older, up from $1,300 in 2020. Single filers can claim a $12,550 standard deduction, up from $12,400 in 2020, and $14,250 if they are 65 years of age or older, up from $14,050 in 2020. Head-of-household filers received a $18,800 standard deduction, up from $18,650 in 2020, plus an additional $1,700 once they reach the age of 65.

Unemployment Compensation

In 2020 unemployment compensation was not taxable, but in 2021 Uncle Sam will fully tax unemployment compensation.

Charitable Gift Deduction

The charitable donation deduction remains the same as 2020 which was the “above-the-line” deduction, but now the deduction is per person, so married filing joint filers can deduct up to $600 (originally was limited to $300 per return). 

Estate and Gift Taxes

For 2021 the lifetime estate and gift tax exemption has increased from $11.58 million to $11.7 million — $23.4 million for couples if probability is elected by timely filing Form 706 after the death of the first-to-die spouse but the tax rate remains at 40%. The gift tax exclusion remains at $15,000 per recipient without having to file a gift tax return or tap your lifetime estate and gift tax exemption.

Education Tax Breaks

The tuition and fees deduction was repealed for the 2021 tax year, but to balance out the loss of the deduction, the lifetime learning credit phase-out thresholds were permanently increased. In 2020 the phase-out for married filing joint filers was a modified AGI from $118,000 to $138,000 which has now been increased to be between $160,000 to $180,000. For single filers the phase-out was a modified AGI between $59,000 and $69,000 which has increased to be between $80,000 to $90,000.

Standard Mileage Rates

For 2021 the standard mileage rates have decreased from $0.575 to $0.56 for business driving and mileage allowance for medical travel and military moves has decreased from $0.17 to $0.16. The charitable driving rate will remain at $0.14 a mile as it has been in previous years.

Long-Term Care Insurance Premiums

The deduction for long-term care insurance premiums have increased for 2021. Any taxpayer who is 71 years of age or older can write off as much as $5,640 per person up from $5,430 in 2020. Taxpayers 61 to 70 years of age can deduct up to $4,520 up from $4,350 in 2020. Taxpayers 51 to 60 years of age can deduct up to $1,690 up from $1,630 in 2020. Taxpayers 41 to 50 years of age maximum deduction is $850 and $450 for 40 years of age and younger. Taxpayers are still subject to the 7.5% limitation related to their adjusted gross income.

Health Savings Accounts (HSAs)

In 2021 the annual cap for deductible contributions to health savings accounts rose from $3,550 to $3,600 for self-only coverage and from $7,100 to $7,200 for family coverage.

Alternative Minimum Tax

For 2021 the alternative minimum tax exemption has increased from $113,400 to $ 114,600 for married filing jointly filers and from $72,900 to $73,600 for single and head-of-household filers. 

There is also higher phaseouts for the exemption in 2021. These phaseouts are $1,047,200 for married filing jointly filers and $523,600 for single and head-of-household filers which are increased from $1,036,800 and $518,400 in 2020.

Tax Brackets for Single/Married Filing Jointly/Head of Household

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As with all of the above strategies, we highly encourage you to discuss any strategies with your accountant before implementation.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.  You should consult with your own tax, legal, or accounting advisor before engaging in any transaction.

Remote Work and Taxes

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With the onset of the Covid-19 pandemic, many employees have turned to working from home. This has created some questions regarding the taxation of remote workers, as well as possible tax deductions.

Employee vs. Self-Employed 

Understanding your status as an employee or self-employed worker is vital to answering any tax question. The main indicator of your status is if you receive a W-2 at year end. This tax document will consist of federal and state wages, tax withholdings, Medicare withholding and benefits. If you received this document, you should consider yourself an employee. 

If you are self-employed, you should have filed a Schedule C in previous tax years if this is a continuing business. If your business is new for this tax year, you should have registered your new business with your respective home state and provided information on sales, expenses, and start-up costs to your accountant. 

Remote Work & State Taxes

You may be wondering what the tax implications of remote work are. As a taxpayer you should expect to be taxed first by your resident state. To determine your resident state, a simple rule of thumb is to use your personal mailing address, thought these rules do vary though from state-to-state so be sure to check on your state’s residency rules. 

If you are an employee, you will find any taxes for additional states on your W-2 in box 15. Additional state taxes could be due depending on where your employer is incorporated, as well as local and state laws, such as with New Jersey residents working in New York City or Philadelphia. Local laws in these cities could have added tax implications for remote workers relating to a nonresident state.

When filing your taxes, you should take note of any other states listed on your W-2. In most cases this will require the taxpayer to file a tax return in multiple states, however some states, such as New Jersey and Pennsylvania, have laws that will give the taxpayer a credit for taxes paid to another state. This will either help you avoid double taxation or reduce your total tax liability. 

What Deductions Can I Claim When Working from Home?

The Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees.

For self-employed taxpayers there are certain deductions you can claim when working from home, including home office expenses, mortgage interest, utilities, real estate taxes, casualty losses, insurance, depreciation, maintenance, and repairs, among others. The IRS provides specific qualifications to be eligible for these deductions. To qualify, the part of the home being claimed must meet one of these criteria:

  • Be used exclusively and regularly as a principal place of business for a trade or business.
  • Be exclusively and regularly used as a place where patients, clients or customers are met in the normal course of a trade or business. 
  • Be a separate structure that is not attached to a home that is used exclusively and regularly in connection with a trade or business.
  • Be used on a regular basis for storage of inventory or product samples used in a trade or business of selling products.
  • Be for rental use. 
  • Be used as a daycare facility. 

When claiming the business use of home deduction there are two methods: the regular or the simple method. The regular method allows the taxpayer to determine the deduction by dividing expenses of the operating home between business and personal use. With the simple method, the taxpayer is prescribed a rate of $5 per square foot for the business use of home. This is however only allowed when the business space is 300 square feet or less.

Important Information for Remote Workers

There is a difference between self-employed remote workers and employees who work remotely. Check in with your employer and find out your status as soon as possible if you are unsure. Positions that are considered remote will only require taxes be paid to your resident state. If your position is not considered remote and you’re a work from home employee, you might have to pay state income tax where your employer’s place of business is located i.e., a New Jersey resident who worked in NYC before the pandemic but has since worked from home will have to pay NYC wage tax. 

If you’re planning to take deductions for working remotely and qualify under IRS rules, be sure to keep detailed logs and receipts for all expenses to protect yourself from any potential IRS audits.