The New Jersey Business Alternative Income Tax (NJ BAIT): What You Need to Know

The New Jersey Business Alternative Income Tax, or NJ BAIT, allows pass-through businesses to pay income taxes at the entity level instead of the personal level.

This law, which took effect January 1st, 2020, mitigates the impact of the federal $10,000 state and local tax (SALT) deduction cap imposed as part of the Tax Cuts and Jobs Act (TCJA).  

NJ BAIT is one of many Pass-Through Entity Tax (PTET) laws now in place nationwide as workarounds to the SALT deduction cap. 

In a recent post, I examined the impact of New York State’s PTET provision.

In this post, I’ll address what pass-through business owners in New Jersey need to know about the New Jersey Business Alternative Income Tax.

NY BAIT what it means to you

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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Jeff Coyle, CPA

Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.

He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.

His business experience includes:

Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.

Jeff also has a long history of helping individuals manage their taxes and plan their finances including:

Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.

Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.

Jody H. Chesnov, CPA

Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004.  After a career of public accounting and general management, Jody knows the value of good financials.  Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.

He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles.  His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.

He has a particular expertise in early-stage growth companies.  His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.

Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller.  He has experience across industries, which gives him a deep understanding of business.

Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.

In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.  

He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.

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