New Jersey Lawmakers Approve Pass-through Entity Legislation

The New Jersey Legislature recently passed the Pass-Through Business Alternative Income Tax Act (A-4807/S-3246). The bill allows flow-through businesses in New Jersey, such as sub-S corporations, partnerships, LLCs or sole proprietorships, to elect to pay income taxes at the entity level instead of at the personal income tax level. The bill would take effect on Jan. 1, 2020.

Under the bill, taxpayers who earn income from pass-through businesses and pay the pass-through business alternative income tax can obtain a refundable gross income tax credit. There is no limit on the deduction of state taxes paid at the entity level under the federal Tax Cuts and Jobs Act (TCJA), only at the individual income level. Currently, pass-through business owners can only deduct up to $10,000 in state and local taxes on their personal income taxes.

The New Jersey Society of Certified Public Accountants (NJCPA) applauded the bill, noting the legislation is estimated to save New Jersey business owners $200 to $400 million annually on their federal tax bills. That’s millions of dollars that will be pumped back into the state’s economy. Furthermore, the bill is revenue neutral and won’t cost the state a dime.