Bill > S3246

Introduced Session

This bill, the "Pass-Through Business Alternative Income Tax Act," establishes an elective entity-level tax to be paid by pass-through businesses and provides an offsetting credit to taxpayers who receive income from a pass-through business. Pass-through businesses are partnerships, New Jersey limited liability companies that are not taxed as incorporated entities by the State, and New Jersey S corporations. These entities are called pass-through businesses because, generally, the profits are passed directly through the business to the owners, and tax is assessed and levied on the owners' individual tax returns. The bill creates an optional entity-level tax on pass-through businesses. Specifically, and at the election of the business, the tax is levied on a pass-through business that has at least one partner, shareholder, or member (collectively, "member") that is a natural person and owes New Jersey gross income tax on income, dividends, and gain received from the pass-through business, and sourced to the State, in the tax year (the "distributive proceeds"). To calculate the amount of tax due, the pass-through business is first required to determine the amount of distributive proceeds that each member receives from the business in the tax year. Then, each member's pro rata share of the distributive proceeds is multiplied by the highest marginal rate under the New Jersey gross income tax, which is 10.75% (the "taxed share"). Finally, the pass-through business adds together each member's taxed share to determine the business's pass-through business alternative income tax liability for the tax year. However, if a member does not owe gross income tax in a tax year, or the liability is less than $1, then that member's amount of distributive proceeds is disregarded for purposes of calculating the pass-through tax liability for the tax year. For a business that chooses to pay the pass-through tax in a tax year, the bill provides a refundable gross income tax credit that is available to taxpayers who are members of the pass-through business. Specifically, the amount of this credit is equal to that member's taxed share, multiplied by 89.25%. However, if a member does not owe gross income tax in a tax year, or the liability is less than $1, then that member is prohibited from claiming the tax credit that is available under this bill for the tax year, since that member's pro rata share of distributive proceeds was disregarded for purposes of determine the tax liability. The Director of the Division of Taxation in the Department of the Treasury is authorized to develop and promulgate rules, regulations, procedures, and forms for the administration and collection of the tax, including but not limited to the payment schedule, and the tax credit provided by this bill. Pass-through businesses may be small and medium-sized, privately owned entities that operate for federal and state personal income tax purposes as pass-through entities and not actual income tax paying entities. For each of these entities, the taxable income is reported on the member's personal tax return, and taxes are paid by the individual. The ability of these individuals to deduct these personal state income tax payments are now restricted as federal personal itemized deductions to no more than $10,000 per year, but are not capped for businesses to use as unlimited business expenses that can reduce the income passed on to their individual members. This bill establishes a new tax and individual tax credit that will preserve, at the business level, an uncapped offset against taxable income, and that business income offset will credit the individual taxpayer for their individual liability attributable to that income derived from the pass-through business. The bill takes effect immediately and applies to taxable years of pass-through entities beginning on or after January 1, 2019.

Committee Categories

Daniel Benson (D)*,  Anthony Bucco (R)*,  Tony Bucco (R)*,  Roy Freiman (D)*,  Steven Oroho (R)*,  Paul Sarlo (D)*,  Troy Singleton (D)*,  Christopher Bateman (R),  Linda Greenstein (D),  Robert Karabinchak (D),  Joe Lagana (D),  Declan O'Scanlon (R),  Nancy Pinkin (D),  Eliana Pintor Marin (D),  Parker Space (R),  Valerie Vainieri Huttle (D),  Harold Wirths (R), 

Approved P.L.2019, c.320. (on 01/13/2020)