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:
- 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
|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.
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 1||April 15|
|Quarter 2||June 15|
|Quarter 3||September 15|
|Quarter 4||January 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.