New Jersey Pass-through Business Alternative Income Tax (BAIT) Updates

Several updates to the New Jersey Pass-through Business Alternative Income Tax (BAIT) have been announced. Owners of New Jersey pass-through entities should take note of the following changes.

Background

The New Jersey BAIT was designed as a work-around to the $10,000 federal limit on the deduction of state and local taxes, enacted in the Tax Cuts and Jobs Act of 2017. The BAIT took effect for tax years beginning on or after January 1, 2020.

Generally, for New Jersey purposes, income and losses of a pass-through entity accrue to its owners. The BAIT allows pass-through entities to elect to pay tax due on the owner’s share of income. The owner(s) may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.

Pass-through entities include:

• Partnerships;
• S-corporations that have made the New Jersey S-corporation election; and
• Limited liability companies (LLCs).

Updates

The changes to New Jersey’s BAIT include the following, effective January 1, 2022:

• For the 2021 BAIT, S-corporations will have the option to use the three-factor apportionment on Form NJ-NR-A to calculate BAIT taxable income. For 2022, S-corporations will be required to use the S-corporation formula (single sales factor). Partnerships are required to use the three-factor apportionment.
• In 2022, S-corporations will be permitted to allocate any BAIT credit received among their members. Partnerships will be permitted to allocate credit received among the partners.
• The 9.12% tax bracket (between $1 million and $5 million of income) has been eliminated. Income in excess of $1 million will be taxed at the 10.9% top rate. This will result in increased credit available (and, as such, a higher federal deduction) for higher-income taxpayers. For some pass-through owners, this may result in a higher expense and larger refund on personal New Jersey returns.
• In 2022, New Jersey expands the definition of “distributive share” of income to include “the distributive share of partnership income derived from sources both inside and outside New Jersey of all partners who are resident individuals, estates, or trusts.” As such, NJ residents will be able to take the deduction on all of their partnership income. This change only affects partnerships; S-corporations will still be taxed only on New Jersey-sourced income.
• The 2021 BAIT election for New Jersey is due March 15, 2022, and must be filed through the NJ Pass-Through Business Alternative Income Tax (BAIT) filing and payment service.