New Jersey Pass – Through Business Alternative Income Tax ActOctober 27, 2020
Legislation was passed on January 13, 2020 establishing a pass-through business alternative tax (PTBAT).
How Does It Work
Starting in 2020, pass-through entities may elect to pay a PTBAT. Paying the tax is an annual election. The tax is based on each member’s share of distributive proceeds. Distributive proceeds mean “net income, dividends, royalties, interest, rents, guaranteed payments and gains of a pass-through entity derived or connected with sources within New Jersey.”
Individuals, estates and trusts receive a credit against their gross income tax equal to the member’s tax on the share of distributive proceeds paid by the pass-through entity.
Pass-through entities allowed to elect:
- Federal S corporations that have made the New Jersey S corporation election
- Limited Liability Companies (LLC)
Single-member LLCs and sole-proprietorships do not qualify to make the election.
How to and Making the Election
The election is made each year by all owners of the pass-through entity or by an officer/member who is designated under the entity’s organizational documents with authority to make the election for all members. The election is made on or before the original due date of the entity’s return. When it becomes available Form PTE-100 must be used to file the election and pay the tax. Form PTE-200-T will be used to apply for a six-month extension of time to file Form PTE-100. All tax is due by the due date of the entity return (calendar years March 15th). Extension requests will be granted as long as the entity has 80% of its current year tax paid. There is no extension of time to pay the tax. It is presumed at this time that if 80% of the tax is not paid by the due date, the extension would be denied and additional penalties and interest would apply to late payments. This item needs to be verified.
An election can be revoked. It can only be revoked prior to the due date of the entity’s return. An election cannot be retroactive.
An election would not be needed in the year the entity reports a net loss.
Fiscal year entities make the election for their taxable years beginning after January 1, 2020.
Estimated payments must be made electronically on a quarterly basis. Payment dates are the same as other calendar year estimated payment due dates; April 15, June 15, September 15 and January 15 of the following year. For 2020 only, no estimated tax penalty will be assessed. This means that for 2020 only, an entity can delay its payment until March 15, 2021 without penalty. In 2021, the entity would begin making estimated payments when due. There were and has been issues with the state website for making payments. The payment site is currently active.
The tax is imposed at the following rates:
- Up to $250,000 5.675%
- $250,001 to $1,000,000 6.52%
- $1,000,000 to $5,000,000 9.12%
- Over $5,000,000 10.9%
The tax is calculated on every member’s share including corporations, estates, trusts and non-profit entities.
As of this writing all forms to be used are not yet available.
Corporations will receive a credit against their tax and surtax but not against the annual minimum tax assessment. Any excess credit can be carried forward up to 20 years.
If an election is timely revoked all estimated payments will be refunded by filing the Revocation and Claim for Refund form.
Estimated payments made for the business alternative income tax cannot be transferred against any other New Jersey tax.
An exempt organization can claim a refund for the tax paid by the pass-through entity.
Non-residents included are still obligated to file a New Jersey non-resident return if they meet the Gross Income Threshold.
Most important is the tax was created in order to obtain a Federal deduction for the NJ income tax on the pass-through entity income.
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