Tax Relief For New Jersey Business Owners

Updated: Dec 24, 2019

Business owners in New Jersey just received an early Christmas present in the form of NJ S. 3246/A. 4807, a bill approved by both the NJ Assembly and Senate authorizing pass through entities (partnerships, S-corporations, and LLC’s) to elect to pay an entity level tax in New Jersey and providing for an equivalent refundable tax credit for the owners of such pass through entities. The bill is intended to work around the state and local tax deduction cap set forth in 2017’s Tax Cuts and Jobs Act, which limited deductions for state and local taxes paid by individuals to $10,000.

Ordinarily, pass through businesses file informational returns, with the tax attributes (items of income, deduction, and loss) passing through to the owners of these entities, who file and pay the taxes on their personal income tax returns. The bill allows New Jersey residents who own pass through entities to elect to pay their New Jersey business income taxes at the entity level rather than receive the tax attributes of their pass through entities on their personal tax returns, and provides these business owners with a credit against their New Jersey tax liabilities equal to the amount of taxes paid by the pass through entity. This offers business owners an effective workaround to the limitation under federal law for state and local taxes paid, because there is no state and local tax limitation applicable to business tax deductions under federal law.

At the time of the passage of the Tax Cuts and Jobs Act, tax advisers and tax policy experts anticipated that high-tax states would propose workarounds to resolve the state and local tax limitation under federal law. Two years later, it seems that states are finally coming up with workable solutions.

The information provided herein should not be relied upon as legal advice. Your receipt of this information does not create an attorney-client relationship between you and Shmuel Law Group, LLC. Any advice provided herein should be discussed between you and your legal and tax advisers and applied to your individual circumstances prior to your acting on it. In certain jurisdictions, this publication may constitute attorney advertising.

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