New Jersey: New Pass-Through entity tax enacted

On January 13, 2020, New Jersey Governor Phil Murphy signed into law the Pass-Through Business Alternative Income Tax Act (SB 3246). The Act is effective immediately and applicable to tax years beginning on or after January 1, 2020. In sum, the bill establishes an elective pass-through entity alternative income tax and allows owners of the pass-through entities to claim a corresponding credit.

Under the new law, a pass-through entity with at least one member subject to New Jersey Gross Income Tax on that member’s share of distributive proceeds of the pass-through entity may elect to be liable for, and pay, a pass-through business alternative income tax. All pass-through entity members must consent to the election. The tax is imposed on the sum of each member’s distributive share, which is then multiplied against the applicable rate. The graduated rate structure ranges from 5.675 percent if the distributive proceeds are less than $250,000 up to $427,887.50 plus 10.90 percent of proceeds over $5,000,000. Members then receive a credit equal to the member’s pro rata share of the tax paid. Non-corporate members will receive a refundable Gross Income Tax credit, while corporate members will receive a credit against the Corporation Business Income Tax that can be carried forward for up to 20 years.  Special rules apply to pass-through entities that are members of a unitary group, S corporations, and exempt corporate members.

The election to pay the alternative tax must be made on an annual basis prior to the due date of the pass-through entity’s return, which is the 15th day of the third month following the close of the tax year, or March 15 for calendar year taxpayers. Estimated tax payments are due on or before the 15th day of the fourth, sixth and ninth months of the tax year and the 15th day of the first month following the close of the tax year.  If members decide to revoke the election, the revocation must be made on or before the due date of the entity’s return. Please contact Jim Venere at 973-912-0369 with questions on the new elective pass-through entity level tax. 

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