What is the New Jersey Pass-Through Entity Business Alternative Income Tax (BAIT)?

A pass-through, or “flow-through,” entity passes income to business owners or investors. The income is taxed at the personal rather than entity level.

This allows pass-through businesses to only pay taxes on that income once. C-corporations, on the other hand, pay both corporate income and dividend taxes.

Most small businesses in New Jersey, including partnerships, S-corporations, and most LLCs, operate as pass-through entities.

The TCJA SALT cap limits individual deductions, which led to a significant increase in federal income tax liabilities for pass-through owners and investors.

That’s where the NJ BAIT law comes in. By allowing shareholders or partners who pay the BAIT to receive a refundable gross income tax credit, the tax helps business owners avoid the $10,000 cap.

What entities are eligible for the NJ BAIT?

Pass-through entities included under this law are:

  • Partnerships;
  • Federal S-corporations that have made the New Jersey S-corporation election;
  • Limited liability companies (LLCs) classified as partnerships or S-corporations for federal income tax. The entity must have at least one member who is liable for tax on their share of the distributive proceeds—meaning the net income, dividends, royalties, interest, rents, guaranteed payments, and gains of the entity derived from or connected with sources in New Jersey.

The sum of these distributive proceeds informs the tax rates, which are as follows:

Sum of distributive proceeds BAIT Tax Rate
$250,000 or less 5.675%
$250,001 – $1,000,000 $14,187.50 plus 6.52% of excess over $250,000
$1,000,001 – $5,000,000 $63,087.50 plus 9.12% of excess over $1M
More than $5,000,000 $427,887.50 plus 10.9% of excess over $5M

Single-member LLCs and sole proprietorships are not eligible for the NJ BAIT.

How do you make the NJ BAIT election?

Log in to New Jersey’s Pass-Through Business Alternative Income Tax (PTE) online filing and payment service to make the BAIT election.

You’ll have to make this election every year, but that can be an advantage. It allows you to decide each year again if NJ BAIT is still the right choice for your business.

You cannot make the BAIT election retroactively. 

So make sure you take this action on or before the original due date of the entity’s return.

The good news is that your election is revocable in the state of New Jersey, but only on or before the original due date of the return. That date is the 15th day of the third month following the close of the entity’s tax year for federal income tax purposes.

In closing…

Pass-through entities owners or investors in New Jersey should consider electing to take the NJ BAIT, as it can offer significant tax savings. However, as in any business decision, you should carefully weigh your unique circumstances. When in doubt, seeking the counsel of a tax professional is always a good idea.

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