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New Jersey Business Owners Get Potential Relief from Federal SALT Deduction Caps by Michael Hirsch, JD, LLM


Posted on February 12, 2020 by Michael Hirsch

The State of New Jersey recently passed a law allowing certain taxpayers to circumvent the $10,000 cap on state and local tax (SALT) deductions imposed by the federal Tax Cuts and Jobs Act (TCJA). Whether or not the IRS will accept this workaround remains to be seen.

The Pass-Through Business Alternative Income Tax Act aims to help New Jersey’s small business owners deduct the full amount of their state and local taxes and save millions of dollars on the taxes they pay to the federal government. Under the law, New Jersey businesses organized as S corporations, partnerships, LLCs and sole proprietorship to make annual elections to incur and pay income tax at the entity level rather than on the personal tax returns of the entity’s individual partners, members or shareholders to whom a business’s income flows. Entities making this election must agree to file an entity tax return and pay the pass-through entity tax (PTE) on or before the due date of its federal tax return. This will require electing entities to quarterly estimated tax payments throughout the year to ensure full payment of the PTE by the entity’s federal tax filing deadline.

Each non-corporate member of the pass-through entity will receive a credit equal to his or her pro-rata share of the tax paid by the pass-through entity. The credit may not exceed the amount what would have been allowed if the income was taxed at the individual level. Corporate members of pass-through entities may also receive a tax credit however, they may not use it to reduce their individual tax liabilities below the statutory minimum tax. Excess credit may be carried over for a period of up to 20 privilege periods.

The Pass-Through Business Alternative Income Tax Act is New Jersey’s second attempt to help its residents minimize the impact of the TCJA on their federal tax liabilities. The IRS blocked a previous plan that would have allowed the state’s taxpayers to convert local property tax payments into fully deductible charitable contributions on their federal tax returns. Prior to the TCJA, taxpayers in high-tax states, including New York, Connecticut and California, could deduct the full amount of their state and local taxes, which would typically exceed $10,000 for high-income taxpayers. Individuals and businesses located in these and other high-tax jurisdictions should consult with their CPAs and tax advisors to ensure compliance with changing tax laws while also implementing strategies to minimize their federal tax liabilities.

About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.