New Jersey Bypasses SALT Cap With Passage of
Pass-Through Business Alternative Income Tax Act
The State of New Jersey recently passed The Pass-Through Business Alternative Income Tax Act which permits flow-through businesses in New Jersey, such as sub-S corporations, partnerships, LLCs and sole proprietorships, to elect to pay income taxes at the entity level instead of at the personal income tax level. This provides New Jersey based businesses a workaround for the $10,000 cap on state and local tax deductions under the federal Tax Cuts and Jobs Act.
The law is estimated to save New Jersey business owners $200 to $400 million annually on their federal tax bills.
Some high-tax states such as New Jersey have moved to pass legislation over the past two years aimed at blunting the impact of the $10,000 cap on state and local tax deductions in the 2017 tax overhaul. New York, for example, set up a state-run charitable fund that taxpayers could contribute to as a way of paying their state taxes and receive tax credits in return. In addition, New York created legislature to support a payroll system that employers could use to reduce their taxes.
The U.S. Treasury Department and the Internal Revenue Service issued regulations last year that effectively prevent state-run charitable funds from being used as a way to circumvent the state and local tax limits However, the tax workarounds for businesses instituted by New York and recently implemented by New Jersey have not been barred as yet.