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New Jersey Enacts Pass-Through Business Elective Entity Tax and Tax Credit

This January, NJ Governor Phil Murphy signed the Pass-through Business Alternative Income Tax Act into law. This established a new elective pass-through business “alternative income tax” with a parallel income tax credit for members.

This new tax structure is applicable to taxable years beginning on or after January 1, 2020. It applies to partnerships, s-corporations and LLC’s, with at least one member who is liable for NJ tax on distributive proceeds. 

The new elective pass-through entity business alternative income tax allows pass-through entities (PTE) to report and pay tax at the entity level.

Rules for the election:

–          Members of the PTE must execute a consent under penalties of perjury

–          Must be made annually on or before the due date of the entity’s return – very important!

–          PTEs are allowed to revoke an election until the due date of the return for that tax year

Now for the part that probably caught your eye – the tax credit!

A refundable gross income tax credit is available for members of an electing PTE that is subject to NJ gross income tax that is equal to the member’s pro-rata share of the PTE tax paid for that period.

Individual members: If the credit is in excess than that of the tax due on the members or shareholders tax return, then the excess amount of credit over tax will generally generate an overpayment/refund.

Corporate members: This tax credit can be applied to the surtax or corporate business tax liability. The credit may not reduce the tax liability below the statutory minimum. The credit is available to be carried forward for 20 years.

Kayleen Kane, MBA

610-687-1600

kkane@stephanoslack.com

March 3, 2020