P.L.2019, c.320 enacted the Pass-Through Business Alternative Income Tax Act, effective for tax years beginning on or after January 1, 2020. For New Jersey purposes, income and losses of a pass-through entity are passed through to its owners. However, the law allows pass-through entities to elect to pay tax due on the owner’s share of distributive proceeds. The owner(s) may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.
Pass-through entities included under this law are:
The entity must have at least one member who is liable for tax on their share of distributive proceeds pursuant to the New Jersey Gross Income Tax Act, N.J.S.A. 54A:1-1 et seq., in a taxable year.
Single member limited liability companies and sole proprietorships may not elect to pay the Pass-Through Business Alternative Income Tax.
“Distributive proceeds” means the net income, dividends, royalties, interest, rents, guaranteed payments, and gains of a pass-through entity, derived from or connected with sources within New Jersey.
The election must be made each year by all owners of the pass-through entity or by an officer or member who is designated under the law or the entity’s organizational documents with the authority to make the election for all members. The annual election will be made on or before the original due date of the entity’s return on forms prescribed by the Division of Taxation. The pass-through entity’s tax return is due on the 15th day of the third month after the close of the tax year; i.e. March 15. Estimated tax payments are due on April 15, June 15, and September 15 of the tax year and on or before January 15 of the succeeding tax year.
An entity that does not have a prior year tax liability will not be penalized under the safe harbor provisions in N.J.S.A. 54:9-6 for the failure to file or make estimated payments.
|Pass-Through Entity Income||Tax Rate|
|Amount between $250,000 and $1 million||6.52%|
|Amount between $1 million and $5 million||9.12%|
|Amount over $5 million||10.9%|
Individuals, estates, and trusts receive a credit against their gross income tax equal to the member’s tax on the share of distributive proceeds paid by the pass-through entity. Nonresident members of a pass-through entity making the Pass-Through Business Alternative Income Tax election can still participate on a Form NJ-1080-C composite return and take a credit for taxes paid.
Corporate members are allowed a credit against the corporation’s business tax equal to the corporate member’s tax on the share of distributive proceeds paid by the pass-through entity. The credit may not reduce the tax liability below the statutory minimum tax. Excess credits may be carried forward for twenty years.