On January 18, 2022, New Jersey Governor, Phil Murphy, signed into law the NJ BAIT Clean Up Bill bringing several favorable changes to the optional NJ PTE election. The bill became effective as of January 1, 2022. The New Jersey BAIT was originally crafted by legislators in response to the limits imposed by the Federal State and Local Tax ("SALT") deduction of $10,000 in the 2017 Tax Cuts and Jobs Act. The workaround had several unintended pitfalls which have been fine tuned in the NJ Bait Clean-up bill to provide additional tax savings to New Jersey shareholders and members of pass-through entities.
The legislation improves upon several areas of the BAIT that were in need of clarification:
- The legislation clarifies that NJ source income will be the basis for calculating the BAIT rather than federal taxable income. Provision is also made for a three-factor apportionment formula. Partnerships (including LLCs treated as partnerships) and S corps generally apply a single sales factor or a three-factor formula respectively. Under the previous law, it was not clear if the apportionment formula would mirror the standard apportionment formula applicable to each entity type. The legislation confirmed that S corporations will now have the option to use a three-factor apportionment rather than a single sales factor normally used on S corporation returns.
- The legislation also eliminates the need for non-resident withholding on partner income, where the taxpayer has reasonable basis that the BAIT would substantially cover the withholding amount required under separate provisions of New Jersey tax law.
- An additional clarification is that payments made in a tiered partnership can be applied to upper-tier non-individual entities. Overpayment of BAIT taxes by a PTE may also be applied to future estimated taxes or, if preferred, they may be refunded.
- Finally, the bill expands the highest tax bracket to include distributable income in excess of $1 million, replacing the former $5 million top tax bracket. The updated threshold may not seem like a benefit; however, the updated provision more closely aligns with the current individual income tax benefits in New Jersey.
In the first fiscal year of adoption, business owners were projected to have saved an estimated $500 million. With a more taxpayer friendly revision to the bill and several other states following the PTE credit model, it's important to consult with the HBK state and local tax team to determine if one may qualify and how HBK can bring clients additional value.
If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.