New Jersey Business Alternative Income Tax (BAIT) (2024)

Quick Reference

Overview

Optional election for pass-through entities to pay entity-level tax to bypass federal $10,000 SALT deduction cap.

Rate: 10.75% on distributive proceeds (same as top individual rate for income over $1,000,000)

Alternative rate (lower brackets): - 5.675% on first $1,000,000 - 10.75% on amounts over $1,000,000

Purpose: Allow entity-level deduction for federal purposes, not subject to SALT cap.

Key Dates (2024 Tax Year)

Election deadline: With first estimated payment

Estimated payment due dates: - April 15, 2024 - June 17, 2024 - September 16, 2024 - January 15, 2025

Return deadline: March 15, 2025 (or extended due date)

Who Can Elect

Eligible entities: - Partnerships (general, limited, LLP) - S corporations - LLCs taxed as partnership or S corporation

Not eligible: - C corporations - Sole proprietorships - Single-member LLCs (disregarded entities)

Details

How BAIT Works

Mechanics:

Without BAIT: 1. Pass-through income flows to owners 2. Owners pay individual NJ tax 3. Owners deduct SALT on federal Schedule A (limited to $10,000) 4. Excess SALT not deductible federally

With BAIT: 1. Entity elects BAIT 2. Entity pays tax at entity level (10.75% or graduated) 3. Entity deducts BAIT as business expense for federal purposes (not subject to SALT cap) 4. Owners receive credit against their NJ individual tax 5. Owners get full federal deduction (no SALT cap)

Federal benefit: - BAIT is deductible business expense - Not subject to $10,000 federal SALT cap - Saves federal tax at owner's marginal rate (up to 37%)

NJ neutral: - Credit equals tax paid at entity level - No NJ tax increase or decrease

Making the Election

Annual election: - Must elect each year - Make with first estimated payment

How to elect: - File Form NJ-1080-V (first estimated payment voucher) - Indicate BAIT election on voucher - Make payment

Revocation: - Election irrevocable once made - Cannot change during year

Who makes election: - Partnership: authorized partner - S corporation: authorized officer - Consent of owners not technically required (but recommended)

BAIT Rate Options

Flat rate: - 10.75% on all distributive proceeds - Simpler calculation - May result in higher tax for lower-income entities

Graduated rate: - 5.675% on first $1,000,000 - 10.75% on amounts over $1,000,000 - More beneficial for smaller entities - Slightly more complex

Entity chooses rate on Form NJ-1080.

Calculating BAIT

Tax base - distributive proceeds: - Sum of owners' distributive shares of income - Calculated at entity level - Similar to federal taxable income with NJ adjustments

NJ modifications: - Add NJ additions (non-NJ bond interest, etc.) - Subtract NJ exclusions

Nonresident owners: - Only their NJ-source income included in BAIT base

Example:

S corporation with 2 shareholders: - Total NJ income: $800,000 - Shareholder A (resident): $600,000 - Shareholder B (nonresident, NJ-source): $200,000

BAIT calculation (graduated rate): - Total subject to BAIT: $800,000 - BAIT: $800,000 x 5.675% = $45,400

Federal deduction: - S corp deducts $45,400 on federal Form 1120-S - Reduces each shareholder's federal K-1 income

Estimated Payments

Quarterly payments required:

Due dates (2024 tax year): - 1st quarter: April 15, 2024 (with election) - 2nd quarter: June 17, 2024 - 3rd quarter: September 16, 2024 - 4th quarter: January 15, 2025

Amount: - Based on estimate of current year BAIT liability - Safe harbor: 90% of current year or 110% of prior year

Form: - Form NJ-1080-V (BAIT estimated payment voucher)

Underpayment penalty: - Applies if estimated payments insufficient

Owner Credits

Owners receive credit for BAIT paid on their behalf:

Credit amount: - Proportionate share of BAIT paid by entity - Shown on NJ Schedule NJK-1 (partner/shareholder information)

Residents: - Claim credit on Form NJ-1040 (resident return) - Credit against NJ tax

Nonresidents: - Claim credit on Form NJ-1040NR (nonresident return) - Credit against NJ tax on NJ-source income

Refundable: - Credit is refundable - If credit exceeds tax liability, refund issued to owner

Timing: - Credit claimed on individual return - May create cash flow timing difference (entity pays, owner gets credit later)

Federal Tax Benefit Calculation

Example:

Facts: - NJ partnership income: $1,000,000 - Single owner in 37% federal bracket - NJ resident, 10.75% rate

Without BAIT: - Federal taxable income: $1,000,000 - Federal tax: $370,000 (37%) - NJ tax: $107,500 (10.75%) - SALT deduction: $10,000 - SALT deduction benefit: $3,700 (37% x $10,000) - Net federal tax: $366,300

With BAIT: - BAIT paid by entity: $107,500 - Federal taxable income: $892,500 ($1,000,000 - $107,500) - Federal tax: $330,225 (37% x $892,500) - NJ tax: $0 (credit for BAIT) - SALT deduction: $10,000 (available for other taxes) - SALT deduction benefit: $3,700 - Net federal tax: $326,525

Savings: - Federal tax reduction: $39,775 ($366,300 - $326,525) - Effective savings: 37% x $107,500 = $39,775

Result: BAIT saves federal tax equal to owner's marginal rate times BAIT paid.

BAIT vs. NY PTET

Similarities: - Both bypass SALT cap - Both entity-level taxes with owner credits - Both federally deductible

Differences:

Rate structure: - NY PTET: flat 10.90% - NJ BAIT: flat 10.75% or graduated (5.675%/10.75%)

Election timing: - NY PTET: March 15 of tax year - NJ BAIT: with first estimated payment (April 15)

Forms: - NY: IT-653, CT-34-SH - NJ: NJ-1080, Schedule NJK-1

Both effective at generating federal savings.

Multi-Tier Entities

If partnership owns interest in another partnership:

Upper-tier partnership: - Can elect BAIT on its own income - Receives credit for BAIT paid by lower-tier partnership - Can pass credit through to its partners

Lower-tier partnership: - Can elect BAIT separately - BAIT paid flows up to upper-tier as credit

Special Situations

Part-year residents: - Allocate credit between resident and nonresident periods

Trusts and estates: - Can be partners/shareholders - Receive credit for their share of BAIT - Report on fiduciary return

Guaranteed payments: - Included in BAIT base - Treated as distributive share

Multi-state entities: - Only NJ-source income subject to BAIT - Allocate to NJ based on apportionment formula

Common Mistakes

Not making estimated payments: - BAIT requires quarterly payments - Underpayment penalty applies

Using wrong rate: - Entity elects flat or graduated - Using wrong rate causes over/underpayment

Owners not claiming credit: - Must claim credit on individual return - Attach Schedule NJK-1

Electing when not beneficial: - Low-income owners may not benefit - If owners not subject to SALT cap, limited federal savings

Cash flow issues: - Entity pays quarterly - Owners get credit when filing (timing mismatch)

Planning Considerations

Who benefits most: - High-income owners (37% federal bracket) - Owners maxing out $10,000 SALT cap - NJ residents with high property taxes

Who may not benefit: - Low-income owners (not subject to SALT cap) - Entities with losses - Owners in states that don't allow credit for BAIT paid to NJ

Coordination with other states: - Some states do not allow credit for entity-level taxes paid to other states - May cause double taxation for multi-state owners

Comparison to other SALT cap workarounds: - BAIT more beneficial than just itemizing (capped at $10,000) - Comparable to NY PTET, CA PTET, other state entity-level taxes

Citations

New Jersey Statutes: - N.J.S.A. 54A:8-8 - Business Alternative Income Tax - N.J.S.A. 54A:8-9 - BAIT credit

Regulations: - N.J.A.C. 18:35-11 - Business Alternative Income Tax

NJ Division of Taxation: - Technical Bulletin TB-95 - Business Alternative Income Tax - BAIT FAQs - https://www.state.nj.us/treasury/taxation/businesses/bait/

Forms: - Form NJ-1080 - Business Alternative Income Tax Return - Form NJ-1080-V - BAIT Estimated Payment Voucher - Schedule NJK-1 - Partner's/Shareholder's Share of Income, Deductions, Credits, etc. - Form NJ-1040 - Resident Income Tax Return (for claiming credit) - Form NJ-1040NR - Nonresident Return (for claiming credit)

IRS Guidance: - Rev. Proc. 2021-45 - IRS allows deduction for state PTET - Notice 2020-75 - SALT cap workaround guidance

Other: - Instructions for Form NJ-1080 - NJ Division of Taxation BAIT webpage - https://www.state.nj.us/treasury/taxation/pdf/pubs/tb/tb95.pdf