Business Alternative Income Tax Revised

Date: January 18, 2022

Governor Murphy signed S-4068 into law. The bill revises the elective pass-through entity business alternative income tax, which was enacted in January 2020. The optional tax allows pass-through entities to pay an entity-level tax while the entities’ owners obtain an offsetting credit against other taxes. The optional tax effectively allows entity owners to reduce the amount of the tax that counts towards the cap on the federal income tax deduction for state and local taxes (SALT).

The bill makes changes to the elective pass-through entity business alternative income tax by modifying:

  • How the optional tax is calculated so that more income is subject to tax, thereby allowing a larger credit to be obtained for paying the optional tax;
  • the offsetting tax credit structure and permitted uses of the credits so that the credits are more generous;
  • the tax brackets for the optional tax to better align with the most recent changes to the State’s gross income tax brackets; and
  • the treatment of overpayments of tax and excessive credits so that they may be applied to tax liability in the successive year, or refunded in the case of corporation business taxpayers.

The changes made by this bill will apply retroactively to taxable year 2020, the first year that the elective pass-through business alternative income tax was is effect.

 

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