Jan 25 NJ Business Alternative Income Tax (BAIT) Law Change
The Tax Cuts & Jobs Act of 2017 drastically limited the federal deduction for state & local taxes to $10,000 for tax years beginning on or after January 1, 2018. As a response, NJ implemented an elective pass-through entity level tax effective for partnership and S-corporation tax years beginning on or after January 1, 2020. NJ refers to this tax as the Business Alternative Income Tax (BAIT). The first year of implementation did not go smooth for NJ because of many issues with the law along with severe inconsistencies between the law and the 2020 BAIT forms.
For tax year 2021, NJ addressed many of these issues by revising the BAIT form calculations to be more in line with the income that will be flowing out to the partners, members, and shareholders. This was an important fix for consistency purposes, but many issues remained due to the law as originally written and the Division of Taxation’s interpretation of that law.
For tax year 2022, a BAIT Clean-Up Bill was signed by Governor Murphy on January 18, 2022 which provides the following changes and clarifications effective for tax years beginning on or after January 1, 2022:
1. For partnerships, BAIT is calculated on distributive income as follows:
- Resident owners: NJ source income and non-NJ source income from the K-1
- Nonresident owners: NJ source income from the K-1
2. For S-corporations, BAIT is calculated on NJ source income from the K-1.
3. The highest tax bracket now kicks in at $1,000,000 to be more in line with individual tax rates.
4. A pass-through entity that receives BAIT credits from another pass-through entity can apply those BAIT credits against its own BAIT (if elected). Previously, pass-through entities receiving BAIT credits could not use those credits against their own elected BAIT. This resulted in duplicate BAIT payments throughout tiered structures.
5. A pass-through entity that receives BAIT credits from another pass-through entity can have those credits refunded. Previously, only partnerships could receive a refund of BAIT credits that it received from another pass-through entity. The result for S-corps was significantly worse as those credits were trapped in the return as nonrefundable credits that would expire after 20 years and could not be used to offset the minimum tax liability.
6. BAIT overpayments can be applied to future tax periods.
7. Partnerships will not be required to make nonresident withholding payments if the entity elects BAIT.
For any questions regarding the Business Alternative Income Tax, feel free to reach out to Sax’s Tax Department at www.saxllp.com.