NJ SALT Work-Around Pass-Through Entity Tax

November 2, 2020

NJ SALT Work-Around Pass-Through Entity Tax:
No Late Filing or Late Payment Penalties for Estimated Taxes in 2020

For New Jersey income tax purposes, income and losses of a pass-through entity are passed through to its members - and each member will then pay tax to New Jersey at the individual level based on the members’ share of the income and losses passed down.

On January 13, 2020, the state enacted the “Pass-Through Business Alternative Income Tax Act.” For taxable years beginning on or after January 1, 2020, the legislation allows pass-through businesses to pay income taxes at the entity level instead of the personal level. This new law also created a refundable tax credit for the members of the pass-through entity.

The law is revenue neutral for New Jersey but is designed to help business owners mitigate the negative impact of the federal state and local tax deduction cap.

For specific details on the Pass-Through Business Alternative Income Tax Act, please see our previous blog.

Filing Requirements
The election must be made annually by the original due date of the return on forms prescribed by the New Jersey Division of Taxation and cannot be made retroactively. The election may be revoked on or before the original due date of the pass-through entity’s return. As of the writing of this article, the forms to be used for this election have not yet been released.

Pass-through entities that filed an election to pay the Business Alternative Income Tax must file Form PTE-100 and pay the tax due. They must also provide Schedule PTE-K-1 to each member reporting the amount of the member’s share of distributive proceeds and Business Alternative Income Tax.

The pass-through entity’s tax return is due on or before the 15th day of the third month following the close of the entity’s tax year. In addition, estimated payments are due on or before the 15th day of each of the fourth month, sixth month, and ninth month of the taxable year and on or before the 15th day of the first month succeeding the close of the taxable year. See below for estimated tax penalty relief for 2020.

A pass-through entity that has elected to pay the Pass-Through Business Alternative Income Tax may elect to file a six-month extension to file Form PTE-100 by filing Form PTE-200-T providing it has paid at least 80% of its current year tax.

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.

No Penalty for Failure to File Estimates
Since 2020 is the first year the Pass-Through Business Alternative Income Tax Act is available, New Jersey issued a statement that taxpayers will not be penalized under the safe harbor provisions for failure to file or make estimated payments for 2020.

Taxpayers should analyze the impact of making this election. Among other things, they should consider whether a member’s resident state will allow a credit on their individual returns for taxes paid at the entity level in New Jersey and the difference in tax rates between the entity level tax rate and the individual member’s state tax rate. For example, currently the PA Department of Revenue has not yet indicated if Pennsylvania will allow the credit for PA residents who pay the New Jersey tax.

Please contact your Herbein tax advisor for additional information or to assist with this analysis.

Article contributed by Michele Burkins. Contact the author at info@herbein.com.