New Jersey’s BAIT Updates Provide an Even Greater Tax Benefit

New Jersey Governor Phil Murphy recently signed legislation modifying the state’s Business Alternative Income Tax (BAIT) regime. The BAIT is an elective entity-level tax which serves as a workaround to the $10,000 federal cap on state and local tax deductions. Internal Revenue Service guidance provides that state pass-through entity taxes (PTETs) are fully deductible as a business expense at entity level, thereby reducing federal taxable income, and can also be applied as a credit against a partner’s or shareholder’s personal state income taxes.

While many pass-through entities have opted into the BAIT since its inception in 2020, the new law changes enhance the regime’s tax benefits and may provide great appeal for those considering an election for the 2022 tax year. Specifically, the bill includes the following changes that are effective as of January 1, 2022:

• It modifies how the BAIT is calculated so that more income is subject to the tax, thus enabling a larger credit to be obtained. Under the revisions, a partnership’s distributive proceeds upon which the tax is computed now includes both in-state and out-of-state income for resident partners. Previously, the elective tax was calculated only on New Jersey-sourced income. Under the rule change, New Jersey resident partners, who are subject to New Jersey gross income tax on all income wherever sourced, can now have the BAIT applied to all their allocated partnership income resulting in a larger BAIT credit. Note that this change is limited to partnerships and does not apply to S corporations, which must continue calculating their BAIT on New Jersey-sourced income only.
• The BAIT tax brackets are now updated to closely align with the recent changes to the state’s gross income tax brackets that went into effect in 2020.
• The treatment of BAIT overpayments is modified so that they can be applied to the estimated tax liability in the subsequent year as opposed to only being refunded.
• The changes also provide that pass-through entities do not need to make nonresident withholding payments on behalf of a nonresident partner if the nonresident expects a refund of the withholdings as a result of the BAIT credit.
• Furthermore, a BAIT credit will be permitted for tiered partnerships and S corporations that are partners in partnerships. Such credits can be passed through to the partners or shareholders, or applied against the tax liabilities of the partnership or S corporation and its BAIT liabilities.

These are welcome changes to the BAIT regime, particularly for New Jersey resident partners who stand to benefit from the increased credits available to them. Additionally, aligning the BAIT rates to the state’s gross income tax brackets will further ensure that taxpayers maximize the value of electing into the tax.

If you have questions regarding how these new BAIT changes can benefit you, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.