New Jersey PTE/BAIT – Planning for 2022
New Jersey PTE/BAIT – Planning for 2022.
Significant revisions to the elective New Jersey Pass-Through Business Alternative Income Tax (PTE/BAIT) are effective for tax years beginning in 2022. The PTE/BAIT, first effective for tax years beginning in 2020, is a work around for the federal $10,000 state and local tax (SALT) personal income tax deduction limitation enacted as part of the Tax Cuts and Jobs Act of 2017. The limitation is effective for tax years 2018 through 2025.
The PTE/BAIT allows pass-through entities to elect to pay and deduct from federal income PTE/BAIT taxes paid on each owner’s share of pass-through income. In New Jersey, an owner’s share of pass-through income is defined as the owner’s “distributive proceeds.” A taxpayer includes the pass-through income in the owner’s New Jersey gross income and claims a refundable tax credit for the tax paid by the pass-through entity on their share of distributive proceeds.
PTE/BAIT Filing Requirements.
A pass-through entity must make an election to pay the Pass-Through Business Alternative Income Tax. To make a election a pass-through entity must be registered with the Division of Revenue and Enterprise Services. An unregistered entity must file New Jersey Form REG-1 online to become registered before making a PTE/BAIT election. Processing of Form REG-1 takes several days and an election can not be made until the registration process is complete.
An electing entity must file Form PTE-100 (Pass-Through Business Alternative Income Tax Return) and pay the tax due. Form PTE-100 is due on the 15th day of the third month after the close of the tax year (i.e., March 15 for calendar year filers).
Distributive Proceeds. For 2022, an owner’s “distributive proceeds” is computed differently for partnerships and S corporations.
Partnerships. For partnerships, a member’s distributive proceeds depends on whether the owner is a resident individual, estate, or trust.
For resident individuals, estates, and trusts, distributive proceeds means a partner’s distributive share of partnership income derived from sources both inside and outside New Jersey. For other partners, distributive proceeds means a partner’s distributive share of partnership income only if derived from sources inside New Jersey. Further, the PTE/BAIT credit is no longer allocated among the partners based on their pro rata share of income but instead is based on the PTE/BAIT tax attributable to their respective share of the PTE/BAIT tax base.
The expanded tax base for resident GIT partners will increase the PTE/BAIT liability of the electing pass-through entity for which a PTE/BAIT credit is available to the resident owner.
S Corporations. For S corporations, an owner’s distributive proceeds only includes the pro rata share of S corporation income allocated to New Jersey. The different treatment for S corporations compared to partnerships reflects a concern that allocating resident and nonresident shareholders other than a proportionate share of the PTE/BAIT tax credit could be viewed as creating two classes of S corporation stock in violation of I.R.C. Section 1361(b)(1)(D).
For tax years beginning on and after January 1, 2022, all pass-through entities are to apply the GIT three-factor allocation formula (property, payroll, and receipts) when determining distributive proceeds. An S corporation must complete and attach Form NJ-NR-A to its Form PTE-100.
PTE/BAIT Tax Payments. An electing pass-through entity is required to make quarterly estimated tax payments under the PTE/BAIT. Underpayments are subject to an underpayment penalty; however, a pass-through entity will not be penalized in the first year it makes a PTE/BAIT Election or if a penalty safe harbor applies to a failure to file or make estimated tax payments. PTE/BAIT estimated payments are deemed to accrue ratably over the tax year, similar to the treatment of wage withholding taxes.
PTE/BAIT Credits. For 2022, business entities will be able to use the PTE/BAIT allocated to them by a pass-through entity in which they hold an interest. The credit can be used against most business activity taxes to which the business entity is subject, including CBT taxes, partnership withholding and similar taxes. The business entity can request a refund of any unused PTE/BAIT credit. If the business entity is itself a pass-through entity, it can pass on the credit to its owners.
New Jersey Credit for Taxes Paid to Other Jurisdictions. A New Jersey resident individual, estate or trust is allowed a credit against the taxpayer’s gross income tax liability for any PTE tax of another state or the District of Columbia which the Division of Taxation determines is substantially similar to the PTE/BAIT. The Division of Taxation has liberally exercised its discretion when identifying SALT workaround schemes that are “substantially similar” to the PTE/BAIT. The Division maintains on its website a current list of jurisdictions qualifying as having a substantially similar PTE tax.
Federal Tax Questions. The federal notice issued by the IRS allows partnerships and S corporations to deduct pass-through entity taxes (called a “Specified Income Tax Payment”). A “Specified Income Tax Payment” is defined as any PTE/BAIT tax paid by a pass-through entity. This language suggests that PTE/BAIT payments are deductible only in the tax year in which the payment is actually made. It is not clear whether a Specified Income Tax Payment can be accrued.
The federal notice stated federal regulations would be issued, but none have been proposed yet. Numerous questions, including the above, remain unanswered.
Also unclear is the federal tax treatment of refunded overpayments of the PTE/BAIT. The United States Tax Court’s application of the tax benefit rule in a different context, suggests that refunded PTE/BAIT overpayments are taxable income in the year received whether or not the taxpayer personally claimed the earlier deduction if the taxpayer’s tax-free receipt of the credit is fundamentally inconsistent with the earlier tax treatment. See: Maines v Commissioner 144 TC 123; Elbaz v Commissioner TC memo 2015-49