Livingston Accountant Addresses New Jersey Business Alternative Income Tax

LIVINGSTON, NJ — In response to the State of New Jersey’s recent adoption of the New Jersey Business Alternative Income Tax (BAIT)—which allows a pass-through business to remit and deduct (for federal purposes only) the New Jersey Gross Income Tax on the taxpayer’s behalf—Michael Karu, CPA/CFF/CGMA, senior member of the Livingston-based accounting firm Levine, Jacobs and Company, has provided some insight to help area business owners better understand how the BAIT works.

Under the New Jersey BAIT, Karu explained that members and shareholders would claim a refundable tax credit for the amount of tax paid by the pass-through entity on each person’s pro-rata share of distributive proceeds. According to Karu, this tax credit is treated as an estimated tax payment for New Jersey Gross Income Tax and claimed when the individual income tax returns are filed.

Although the New Jersey BAIT is elective and therefore not mandatory for eligible entities—which include partnerships, limited liability companies and Federal S corporations that have made the New Jersey S corporation election—the Internal Revenue Service approved the federal deduction earlier this month.

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Single member LLCs and sole proprietorships are not eligible.

According to Karu, eligible entities must have at least one member who is liable for tax on his or her share of distributive proceeds pursuant to the New Jersey Gross Income Tax Act.

The election must be made each year “by all owners of the pass-through entity or by an officer or member who is designated under the law or the entity’s organizational documents with the authority to make the election for all members,” he added.

 

The tax is calculated based on the following:

Pass-Through Entity Income                                Tax Rate           Maximum Tax                  Total Tax

First $250,000                                                                5.675{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}                   $14,187.50                           $14,187.50

Amount between $250,000 and $1 million                 6.520{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}                   $48,900                              $63,087.50

Amount between $1 million and $5 million                 9.120{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}                  $364,000                            $427,887.50

Amounts over $5 million                                                 10.900{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}

 

“If you elect to participate, it is likely that you will have an overpayment when you file your tax returns,” said Karu. “Since the BAIT is calculated based on the business’ full year’s profits, you will be paying the tax on the full year’s profits. Presumably, you already have paid your first three quarterly estimates to New Jersey.

“Also, depending on your New Jersey tax bracket and that the business will be remitting the tax based on the graduated rates above, the rates that the total taxes being paid may be higher for 2020. The sole reason for electing the New Jersey BAIT is for you to receive a federal tax deduction for the New Jersey Gross Income Taxes paid, which, due to the state and local tax (“SALT”) limitations, you are not receiving.”

For 2020 only, Karu noted that payment rules are different than for future years. For Cash Basis Taxpayers, the payment is due by Dec. 31, 2020 without penalty or interest being incurred. For Accrual Basis Taxpayers, the payment is due by January 15, 2021.  Commencing 2021 estimated taxes for the BAIT will be due April 15, June 15, Sept. 15 and Jan. 15 (2022).

The answers to frequently asked questions on this topic are currently available for review on the state’s website BY CLICKING HERE.

Karu also shared the following example and invites community members to contact him at Levine, Jacobs and Company at mkaru@ljcpa.com with any additional questions they may have.
























     

Example of NJ BAIT Calculation

   
     

Assuming an Entity has 4 NJ Resident members with total income of $400,000 that is sourced 100{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4} to New Jersey.  Each are equal members with each being a 25{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4} owner

   
     

The Entity NJ Ordinary Income Subject to NJ BAIT Tax

           400,000

 
     

NJ BAIT Tax Calculation on the Entity level payable by Entity :

 Tax Rate

Tax

First $250,000

5.675{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}

         14,188

Amount between $250,000 and $1 million

6.520{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}

           9,780

Amount between $1 million and $5 million

9.120{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}

              N/A

Amount over $5 million

10.900{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}

              N/A

Total NJ BAIT Tax – Payable by Entity (Due 12/31/2020)

 

         23,968

     
     

Allocation per Member, 1/4 Allocation per Member or 25{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4}:

   

Share of Ordinary Income per Member – Federal K-1 (Reported on each member’s Federal Income Tax Return)

 100,000-5,982 or


          94,018

 

Share of Ordinary Income per Member – NJ K-1 (Reported on the member’s NJ Individual Tax Return)

            100,000

 

NJ Share of NJ BAIT (Refundable Credit) – On NJ K-1 (Reported on the member’s NJ Individual Tax Return)

              5,992

 

Federal Tax Savings on NJ BAIT Deduction – Assuming a 30{f13b67734a7459ff15bce07f17c500e58f5449212eae0f7769c5b6fbcf4cc0c4} Federal Tax Rate

              1,798

 
     

Levine, Jacobs & Company, LLC prides itself on its teamwork abilities, where “every account receives the talent and expertise of the whole firm.” CLICK HERE to learn more about the local firm.