New Jersey enacted the Business Alternative Income Tax (“BAIT”) in early 2020 in response to the federal $10,000 limitation on the deductibility of state and local taxes. The legislation enables pass-through business owners to take a deduction for state and local taxes paid at the entity level, creditable to an individual or corporate owner’s New Jersey Gross Income Tax or Corporate Business Tax, respectively. The BAIT election can provide the opportunity for tax savings for those businesses with significant activity in New Jersey.
The BAIT is effective for tax years beginning on or after January 1, 2020 and is designed to provide an above the line deduction for the pass-through entity. The election must be made before March 15, 2021 for calendar year-end taxpayers.
As businesses prepare to file their New Jersey 2020 tax return, there are several considerations to evaluate whether the BAIT election may be appropriate for the business and its shareholders, partners, or members.
- Is the business located in New Jersey?
- Does the business have a large customer base in the state of New Jersey?
- Does the business have significant property and/or payroll in the state of New Jersey?
While a BAIT election may offer significant benefits, it is not always in the best interest of the pass-through business or its shareholders, partners, or members. There are nuances to the mechanics that might, in fact, make it unattractive. When deciding whether to file the BAIT election and pay tax at the entity level, be sure to also consider:
- Taxpayers that historically file on or before the original due date will not be able to do so because the BAIT forms most likely will not be ready in time. Businesses will be required to compute the BAIT using a three factor apportionment formula, which could be disadvantageous for non-residents of New Jersey or resident owners whose businesses are primarily located outside New Jersey.
- Non-resident withholding is still required and, coupled with the BAIT payment, would result in duplicate payments to the state.
- BAIT payments cannot be transferred to other taxes.
- The BAIT credit could get trapped when the election is made by a lower-tier pass-through entity which is owned by another pass-through entity
- The BAIT payment may not result in a resident tax credit in the home state of a partner, shareholder, or member.
States continue to seek opportunities for individuals negatively affected by the SALT limitation under the Tax Cuts and Job Act of 2017 while businesses look for deductions and the ability to minimize their tax burden. The potential value of these opportunities is often highly specific to a business’s individual circumstances. Therefore, it is important to fully evaluate state legislation designed to benefit business owners and determine whether there is a real benefit to be gained. The above items are just a few considerations your business should evaluate as you determine whether to take the BAIT.
To learn more about the pros and cons of the New Jersey BAIT and the potential benefits it could have for your business, call us at 215.441.4600 or reach out to any member of our State and Local Tax Strategies team at Email.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.