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Implications of NJ BAIT for Law Firms
On Jan. 13, 2020, NJ Governor Phil Murphy signed into law Senate Bill 3246 (S. 3246) establishing the "business alternative income tax" (BAIT), an elective New Jersey business tax regime for pass-through entities (PTEs). Law firms are left wondering if electing to pay the BAIT is the right choice. This article summarizes how the NJ BAIT works, as well as its pros and cons for companies in the industry.
The new law allows pass-through entities such as S corporations and LLCs to elect to pay NJ income tax at the entity level, as a business tax, and to pass through a net amount of Federal taxable income to the owners of the business along with a gross amount of NJ taxable income a NJ tax credit to prevent double taxation in NJ. By passing through a gross amount of NJ taxable income and a credit, the owner is not required to separately pay NJ income tax that could be subject to the SALT limit. Absent this election, the business would pass through a gross amount of Federal and NJ taxable income to the owner, the owner would pay NJ income tax, and the owner's tax payment would be subject to the SALT limit. The BAIT applies to PTE tax years beginning on or after Jan. 1, 2020. A detailed article regarding the BAIT tax and its mechanics can be found here.
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