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NJ Amends its SALT Cap Workaround

NJ Amends its SALT Cap Workaround

On January 18, 2022, NJ amended its SALT cap workaround in order to allow New Jersey taxpayers an expanded benefit for paying NJ tax.  As a result of the amendment, the distributive proceeds that are subject to the partnership level tax have been redefined to include the sum of (i) resident partners’ distributive share of […]

On January 18, 2022, NJ amended its SALT cap workaround in order to allow New Jersey taxpayers an expanded benefit for paying NJ tax.  As a result of the amendment, the distributive proceeds that are subject to the partnership level tax have been redefined to include the sum of (i) resident partners’ distributive share of partnership income derived from sources both inside and outside New Jersey, but only with respect to partners who are resident individuals, estates, or trusts; and (ii) the distributive share of partnership income derived from sources inside New Jersey of all partners of the partnership who are not resident individuals, estates, or trusts.

This amendment will provide a greater benefit of the BAIT to resident partners because in years prior to 2022 the definition of distributive proceeds in N.J.S.A. 54A:12-2 was limited to income derived from or connected with New Jersey sources. Since resident partners are subject to New Jersey Gross Income Tax (“GIT”) on all of their partnership income, regardless of source, it makes sense to expand the BAIT tax base to include income from all sources.

Unfortunately, the Legislature did not make the increased BAIT benefit available to S Corporation shareholders. For S Corporations, distributive proceeds that are subject to BAIT are limited to the pro-rata share of S Corporation income allocated to New Jersey, as is currently the case in New York.

Additionally, the Legislature revised the BAIT tax rates so that if the sum of each member’s share of distributive proceeds attributable to the pass-through entity is over $1 million, the BAIT liability is $63,087.50 plus 10.9% of the excess over $1 million. Previously the 10.9% rate only applied to distributive proceeds over $5 million.