New Jersey Legislation Addresses $10,000 Federal Cap on State and Local Tax to Allow Greater Deductibility for Partners and Owners of S corps and LLCs

February 10, 2020

Governor Phil Murphy has signed legislation that creates an alternative pass-through tax that enables owners to get around the $10,000 Federal Cap on state and local tax deductions.   The legislation allows for an election of an entity-level tax with a corresponding tax credit effective for tax years beginning on or after 01/01/2020. This is in response to the "Tax Cuts and Jobs Act."

To take advantage of the legislation, a consent for the election must be made annually on or before the due date of the entity's return by each member of the electing entity or by any officer, manager, or member of the electing entities authorized to make the election. This election may not be made retroactively but can be revoked if the revocation is made on or before the due date of the entity's return. Election forms are yet to be released by the Division of Taxation.

The tax imposed on a pass-through entity will be equal to each member's share of NJ distributive proceeds attributable to the pass-through entity for the tax year multiplied by:

(1) 5.675%, if the distributive proceeds of the entity are not greater than $250,000 in the tax year;

(2) $14,152 plus 6.52% of the excess over $250,000, if the distributive proceeds of the entity are not greater than $1 million, but greater than or equal to $250,000, in the tax year;

(3) $63,087.50 plus 9.12% of the excess over $1 million if the distributive proceeds of the entity are not greater than $5 million, but greater than or equal to $1 million in the tax year; or

(4) $427,887.50 plus 10.9%, if the distributive proceeds of the entity are greater than or equal to $5 million in the tax year.

If you are owners of New Jersey pass through entity, contact your PW partner to identify what you could save in taxes. 

Electing entities must file an entity tax return and make payments on or before the 15th day of the third month following the close of each entity's taxable year for federal income tax purposes; i.e., March 15, 2021 for the year 2020 return. However, a pass-through entity is required to make estimated entity tax payments on or before the 15th day of each of the fourth month, sixth month, and ninth month of the tax year and on or before the 15th day of the first month succeeding the close of the tax year.  The first estimated tax due date is April 15, 2020. 

Each non-corporate member of the pass-through entity will receive a credit that is equal to the member's pro rata share of the tax paid by the pass-through entity. If the credit exceeds the amount due, the excess is refundable. Corporate members will be allowed a tax credit against both the corporate business tax and the surtax. However, the credit for corporate members may not reduce the corporate member's tax liability below the statutory minimum tax. Any excess credit may be carried over for a period of up to 20 privilege periods.

 Disclaimer: Please check with a partner at Perelson Weiner regarding this material. Clients and others should not rely solely on this information when making decisions.