New Jersey State and Local Tax (SALT) Deduction Planning Opportunity
In January 2020, New Jersey Governor Phil Murphy signed legislation creating the Business Alternative Income Tax (BAIT). Effective for income tax years beginning on or after January 1, 2020, the legislation allows New Jersey pass-through entities (PTEs) to pay and deduct income tax at the entity level.
The legislation provides that a PTE with at least one member subject to a New Jersey Gross Income Tax on that member’s share of income of the PTE may elect to pay the BAIT. Under the legislation, a “pass-through entity” is defined as a partnership, New Jersey Subchapter S corporation or Limited Liability Company classified as a partnership for federal income tax purposes.
On November 9, 2020 the IRS issued Notice 2020-75 (“Notice”) stating that SALT paid by a PTE is now fully deductible at the entity level. For those practitioners and taxpayers that tried to utilize the New Jersey website’s BAIT payment option in 2020, they soon realized that only PTE were eligible to make the BAIT payment. Entities classified with the State of New Jersey as a single-member limited liability company or sole proprietorship are not eligible.
With the dawning of a new calendar tax year, the Notice is an opportunity to review the structure of our client’s entities and discuss if a change of entity status presents a planning opportunity.