NJ Business Alternative Income Tax Gets Cleaned Up
New Jersey’s Business Alternative Income Tax (BAIT) was signed into law in 2020 to combat the increase many taxpayers in NJ faced as a result of the $10,000 state and local tax deduction cap put in place by the Federal Tax Cuts and Job Act (TCJA) of 2017. The bill allowed NJ taxpayers to quickly lower their tax bills, however, the actual implementation of the bill (and associated tax forms) was far from perfect and left taxpayers with more questions than answers. To rectify the implementation issues with BAIT, NJ Governor Murphy signed a bipartisan bill (S4068) that “cleans up” aspects of the original tax that did not work well in practice. Such changes are effective for BAIT years that begin on or after January 1, 2022:
- Tax Base for NJ Residents – The BAIT will now be calculated on all income earned by New Jersey resident partners/LLC members, not just their share of NJ sourced income. The new calculation includes more income that is subject to the tax, thereby allowing for a larger BAIT to be paid, resulting in a larger credit for the partners/members of the pass thru entity. Please note – this change is only applicable to the calculation for partnerships; S Corporations will continue to use NJ source income in the calculation.
- Bracket Change – Income in excess of $1 million is taxed at 10.9%. There was previously a 9.12% tax bracket for income in excess of $1 million but not over $5 million. This change was made to align the BAIT tax brackets more closely to the state’s gross income tax brackets.
- Nonresident Withholding – Partnerships or LLCs taxed as a partnership are no longer required to withhold New Jersey gross income tax on behalf of a nonresident partner/LLC member who reasonably expects to be refunded such withholding due to their anticipated BAIT credit.
What does this mean for you?
With the new BAIT calculation, which allows for greater credits that more closely align with a partner/member’s gross income tax position, comes the need to re-evaluate 2022 NJ BAIT estimated tax payments being made. In addition, pass thru entities may be able to adjust and/or stop making non-resident withholding payments with regards to their CBT requirements. Please reach out to discuss the direct implications to your business before making third quarter estimates due September 15th.