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New Jersey Tax Ceiling Dodge


Edsel

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For those that aren't aware of the legislation that NJ's governor signed into law this week, this will allow flow-through entities and sole proprietorships to elect to be taxed at the entity level instead of at the personal level.  

This is totally different than the Schedule A SALT limitation workarounds that were to utilize charitable donation/tax credits that other states tried and that were ultimately shot down.  So far as I know, there's been no word from Treasury or IRS to know if this method will also be barred. 

Here's an article with some more information about it: https://www.accountingtoday.com/news/new-jersey-governor-signs-bill-to-bypass-salt-cap-on-small-business-tax-deductions

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21 minutes ago, Lion EA said:

CT has been taxing pass-through entities for over a year now. The K-1s pass through the CT tax paid, and an ever-shrinking percentage is used by the partners &/or shareholders on their personal CT returns as a credit. A LOT of paperwork. And, I charge for it.

That's how some states have ensured they get their taxes from nonresident owners of pass-throughs, by collecting it at the entity level and then the indivudual claims the taxes paid on their behalf along with withholding, estimates, and extension payments made.  In those cases, any state tax withheld be claimed as paid toward the liability on the state return, but it would also still end up as a deduction on the Federal Schedule A subject to the SALT limitation.  In my state, the passthrough entity withholds at the top marginal rate, and if the nonredient is due any refund then they have to file.

This new NJ law is totally different than that above.  I haven't looked at the law itself, but the way that linked article is written, it sounds like NJ is going to allow the entity itself to take a deduction for the taxes paid and pass through a lesser net amount of income.  It's trying to shift the deduction to the entity, not passing through a credit or deduction that would appear anywhere on the individual return 

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Both CT and NY did the non-resident thing for a short time, and, of course, at the top rate.

The newer CT tax on PEs is a deduction at the entity level on the federal return (taking it off the personal federal return where it would be of no use) at the top rate. But, it does pass through a percentage of the tax paid to the personal CT return. Of course, for 2019 the percentage is smaller than it was for 2018.

And, it hits residents and non-residents alike. Generating more tax for CT and more paperwork for all, even though CT sold it as helping its taxpayers!

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Yes, it's a state tax paid by an entity, so the entity deducts the tax at the entity level. Partnerships and S-corporations only. Less entity profit to passthrough to personal returns; lower personal federal tax, supposedly to help make up for the SALT cap. Then that ever-shrinking percentage as a credit on personal CT returns. It was sold as a win-win for all. But, CT benefits the most. And, we tax preparers who have entity ES tax computations and CT tax credits and more forms with the entity returns and personal CT returns, more paperwork. A LOT of time explaining it to PEs during 2018 when the law was passed (in May or June?) and made retroactive to 1 January 2018, so everyone had missed one or two ES payments. I really need to raise my fees again this year!

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So, NJ will allow pass throughs to take a personal deduction on a business return.   Guess what will happen in an IRS audit!

The article included sole proprietorships.  If that is the case, it is more than just pass-thrus.   I'm betting that this gets shot down.

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I don't see how NJ can sell their method on sole proprietorships.

The CT law re PEs hasn't been challenged by the IRS -- yet. The CT law taxes PEs on their profits, requires electronic ES payments by PEs, and a couple of other provisions. It's only effect on federal personal returns is smaller pass-through profits so smaller federal taxes. (Not like NY's try at a charitable contribution, no quid pro quo on federal personal returns.) The credit happens on the CT personal returns. 2019 was only the second year, so we'll see how CT makes out.

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It appears that sole-props are Not included.

In fact, the net tax savings effect is very minimal.  NJ increases its tax, a small amount of fed tax is reduced. The example given in the following article of a person with net income of $150K, saves $908.

If this is the case, I take back my forecast.  It doesn't seem enough for the IRS to bother with.

https://pollockfirm.com/pass-through-business-alternative-income-tax-act/

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28 minutes ago, Max W said:

It appears that sole-props are Not included.

In fact, the net tax savings effect is very minimal.  NJ increases its tax, a small amount of fed tax is reduced. The example given in the following article of a person with net income of $150K, saves $908.

If this is the case, I take back my forecast.  It doesn't seem enough for the IRS to bother with.

https://pollockfirm.com/pass-through-business-alternative-income-tax-act/

@Max W  Ed, that's an article from a year ago and is not the legislation being asked about.  The current legislation was passed in Dec 2019 and signed into law by the NJ governor this week.

Give me a couple of minutes more and I'll find a blog from a NJ CPA that also made mention of it recently.

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Quote

Here's a c&p from The Hill, dated 3 days ago:

New Jersey Gov. Phil Murphy (D) signed bipartisan legislation on Monday aimed at helping small business owners who were adversely affected by the $10,000 cap on state and local tax (SALT) deductions under President Trump's 2017 tax law.

So-called pass-through businesses, such as partnerships and sole proprietorships, will soon have the option to pay state income taxes at the entity level rather than at the individual level. The Trump tax law only created a cap on deductions for state and local taxes paid at the individual level.

The New Jersey law takes effect for the 2020 tax year.

The authors of the legislation said the law could help small business owners save money, since most small businesses in New Jersey pay taxes through the personal tax code. Other businesses organized as pass-throughs include law firms, accounting firms and medical practices.

“This law will help to defray the out-of-pocket income tax hit for small business owners here in New Jersey and help alleviate the inequities created by the federal tax law,” state Sen. Troy Singleton (D), one of the authors of the legislation, said in a statement.

State lawmakers worked on the legislation with the New Jersey Society of Certified Public Accountants (NJCPA). The group praised the enactment of the measure.

"We are grateful to the Governor, the Legislature and all those who supported the bill," NJCPA CEO and Executive Director Ralph Albert Thomas said in a statement. "Their dedication to assisting small businesses in New Jersey does not go unrecognized."

Congressional Republicans argue that the SALT deduction cap is important because it reduces the federal tax code's subsidy of states with higher taxes like New Jersey. They also point out that most people, even in higher-tax states, have received a tax cut under the 2017 law.

But policymakers from high-tax states have argued that the deduction cap unfairly punishes residents of their states and makes it harder for those states to offer robust public services.

The bill Murphy signed into law this week isn't New Jersey's first effort to mitigate the impact of the SALT deduction cap. Murphy signed legislation in 2018 aimed at allowing people to convert their local property tax payments into charitable contributions that could still be fully deductible on federal tax returns. However, the IRS has issued guidance to prevent that type of program as a workaround to the deduction cap.

New Jersey, New York and Connecticut have filed a lawsuit to challenge that IRS guidance. The three states and Maryland are pursuing a separate legal challenge to the deduction cap itself.

 

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And this is the blog by a NJ CPA firm, Hill, Barth & King LLC:
https://hbkcpa.com/nj-passes-salt-10000-cap-work-around/

Quote

January 14, 2020 Cassandra Baubie, JDCassandra Baubie, JD

Under the Tax Cuts & Jobs Act (TCJA), taxpayers are now limited to a deduction of $10,000 for state and local taxes. One state that has been impacted heavily by this provision is New Jersey.

New Jersey has higher than average state taxes, and state officials have been looking for a solution or work around to this cap since TCJA was passed. Ultimately, New Jersey unanimously passed the “Pass-Through Business Alternative Income Tax Act.” The Act has passed and was signed by the Governor on December 13, 2019. It went into effect January 1, 2020 and it is expected that this legislation will save New Jersey business owners between $200-$400 million annually on their federal tax bills.

Through this Act, New Jersey is effectively modifying their “state and local” taxes such that they become an income tax through an “elective entity-level” tax for businesses, allowing them to be taken as a business expense. The Act will allow flow through businesses located within the state of New Jersey to elect to pay income taxes at the entity level instead of at the personal level.

State officials have noted that litigation over this issue is likely, although they believe that they have the authority to make these changes.

Since this is a developing story, we will keep you apprised of developments as they occur. If you have specific questions, please contact an HBK advisor in one of our offices in the state of New Jersey or through the HBK Tax Advisory Group.

About the Author(s)

Cassandra Baubie is a Senior Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Prior to joining HBK, she worked for Jurist.org, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Cassandra also worked for the University of Pittsburgh School of Law’s Low-Income Tax Clinic where she performed IRS litigation and Tax Court work and provided compliance work for low income individuals and businesses. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation. She has been involved in numerous sales and use tax, franchise tax, and corporate income tax audits, VDA’s, and refund requests. She focuses on complex sales and use tax compliance planning, nexus studies and on-site review and training for all SALT related issues, and has managed various engagements as the in-charge team member and has significant experience in multi-state tax issues.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

 

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Judy, the Jan 2019 article is about the same legislation (see the title in both articles)  As the writer said, it wasn't finalized and that some changes could be made, but it appears to be substantially the same.  What could have changed is some of the numbers, but so far no details.

The NJ legislature only sits for 3 months and only for 4 days/m., which is why it took a year to get to a final vote.

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