On January 18, 2022, Governor Phil Murphy signed into law New Jersey Senate Bill 4068/Assembly Bill 6110 (S. 4068), which revises significant aspects of New Jersey’s elective pass-through entity (PTE) tax, known as the Business Alternative Income Tax (BAIT).1 

S. 4068 revises New Jersey’s existing law2 by:

• Modifying the tax base for PTEs classified as partnerships for federal income tax purposes (i.e., “distributive proceeds”) to include 100% of the distributive share of income of New Jersey residents and the New Jersey-source distributive share of income of nonresidents

  • The tax base for PTEs classified as S corporations remains the new Jersey-sourced aggregate distributive shares of all resident and nonresident shareholders3

• Adjusting the 10.9% top marginal tax bracket from over $5 million of each member’s distributive proceeds to over $1 million

• Allowing a PTE that overpays the BAIT to carry the overpayment forward as a credit against its BAIT liability for the following year (correcting an ambiguity in the existing law)

• Clarifying that the BAIT credits for each partner/shareholder pertains to the direct share of BAIT paid on its behalf

• Clarifying the nature of BAIT credits to partners and shareholders of electing entities as follows:

  • Natural persons — refundable credit applied against New Jersey gross income tax (GIT)

  • Estates and trusts — refundable credit applied against GIT, allocable among beneficiaries or applied against the tax liability of the estate or trust

  • C corporation — refundable credit applied against New Jersey corporation business tax (CBT) or surtax

  • S corporation — refundable credit applied against GIT, allocable among shareholders, or applied against the S corporation’s CBT or surtax (if the S corporation files as a New Jersey C corporation)4

  • Partnership – refundable credit applied against GIT, allocable among partners, or refundable credit applied against nonresident withholding liability and the partnership fee

• Authorizing the Director of the New Jersey Division of Taxation (NJ DOT) to further clarify the nature of credit utilization

• Eliminating the 20-year credit carryforward limitation

• Establishing that a partnership is not required to remit nonresident partner withholding tax for any nonresident partner that reasonably expects to receive a full refund of such withholding payments on account of the partnership’s BAIT payments5

S. 4068 went into effect January 1, 2022, but it does not specify whether the effective date pertains to tax years beginning or ending on or after that date or applies simply to all periods containing that date.

The NJ DOT has announced that it will issue updated guidance (i.e., form instructions and FAQs),6 including:

• How to apply the BAIT non-payment safe harbor to a PTE’s first-year BAIT election

• How NJ CBT-100S filers (i.e., S corporations) can calculate their distributive proceeds using Form NJ-NR-A (Business Allocation Schedule)

• Which PTEs may elect to file a consolidated return7

Implications

S. 4068 addresses several issues that complicated implementing the original BAIT legislation. Under the revised law: (1) New Jersey resident partners (but not S corporation shareholders) will receive a BAIT benefit (i.e., a federal tax deduction) based upon their entire (as opposed to just the New Jersey-sourced) distributive proceeds from their PTEs, (2) taxpayers will have greater flexibility to utilize the BAIT credit, (3) S corporations are no longer at risk of “trapping the BAIT credit” under certain scenarios, and (4) partnerships are, to an extent, relieved of making double tax payments on behalf of nonresident partners.

The NJ DOT also announced new relief provisions that align S corporation and BAIT payments and an option for consolidated pass-through reporting.
Additionally, the NJ DOT should clarify whether S. 4068’s effective date pertains to tax years beginning on or after January 1, 2022, or applies to any period that contains that date.
Electing calendar year partnerships may want to consider S. 4068 before making subsequent BAIT payments.

Endnotes

1 PTEs include partnerships, S corporations and LLCs treated as either.

2 See Tax Alert 2021-0110.

3 As in other states, the distinction the New Jersey legislature made between electing S corporations and electing partnerships by not allowing the BAIT for resident S corporation shareholders to be determined on 100% of their distributive share of the S corporation’s income may have been due to a perception that to do so would violate the “single class of stock” requirement for valid S corporation elections for federal income tax purposes.

4 This provision appears to have been inserted to address concerns that BAIT tax overpayments by S corporations could not be recovered by shareholders or by the S corporation.

5 This provision relieves partnerships with New Jersey nonresident partners from having to make duplicate payments under the nonresident partner withholding law and the BAIT law.

6 The NJ DOT did not forecast the date its guidance will be issued when it issued the announcement on its website on January 18, 2022.

7 This is an unexpected development but may be advantageous to select taxpayers with tiered pass-through entities when details are released by NJ DOT.