The Business Alternative Income Tax (BAIT) is New Jersey’s innovative solution for business owners to minimize the impact of the limitation on deducting state and local taxes (SALT) in computing federal income tax resulting from the Tax Cut and Jobs Act of 2017 (TCJA). Under the TCJA, a taxpayer is limited to a federal tax deduction aggregating $10,000 for all SALT, including real estate and income taxes. For businesses that report their income utilizing pass-through entities (PTEs) – LLCs, partnerships or Sub S corporations – this means that, essentially, not all of the SALT assessed on their business would be deductible as an “ordinary and necessary expense” in computing federal income taxes.
To receive the benefits of the BAIT, a PTE makes an annual election to be taxed under the entity-level regime. Taxes are paid on the income of the PTE by the PTE, and the owners of the business receive a refundable credit to apply against their personal taxes computed on the same income. This eliminates any double taxation, a key component to the success of this solution.
In implementing the BAIT, the New Jersey Division of Taxation has provided forms, FAQs and other guidance. Unfortunately, some of the interpretations and guidance are not in line with the initial legislative intent of the bill, and there is an effort underway to administratively and legislatively fix these handful of implementation issues.
While the BAIT is an imperfect solution to the SALT limitations, it is a giant step forward in mitigating the economic losses created under TCJA. During the fiscal year ended June 2021, New Jersey collected approximately $2.1 billion in BAIT, which, after applying an effective federal tax rate of 25%, results in tax savings to New Jersey business owners of more than $500 million – a huge benefit by every measure.
The New Jersey BAIT was so successful that 19 states followed suit and have adopted some form of PTE tax. If imitation is the highest form of flattery, then New Jersey has much to be proud of in our leadership regarding the advancement of this effective and valuable tax legislation.
Business owners should consult with their tax advisors to explore how they can take advantage of this tax-savings technique.
About the Author: Alan D. Sobel, CPA, CGMA, is the managing member of SobelCo and the immediate past president of the New Jersey Society of CPAs (NJCPA). He developed the original concept for the BAIT and worked together with the NJCPA to draft the Pass-Through Business Alternative Income Tax Act legislation. Alan can be reached at email@example.com.Related Articles: