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Tax Advantages for N.J. Business Owners of Pass-Through Entities

While 2020 has not been anyone’s favorite year, some New Jersey business owners may be getting some extra relief when it comes time to file their tax returns. Early this year, the N.J. Division of Taxation enacted the Pass-Through Business Alternative Income Tax Act.

Before we get into the technical details of the Act, let’s first discuss what a “pass-through entity” is. For the purposes of this Act, eligible pass-through entities are: partnerships, S-Corporations that have made the N.J. S-Corporation election, and limited liability companies (LLCs). If your business falls into one of these categories, that means that rather than the business paying taxes on its income, the income is “passed through” the business to the business owner’s tax return. The business income shows as income to the business owner on the owner’s personal tax return, and the owner then pays regular income tax on that amount. Unfortunately, at this time single member LLCs and sole proprietorships are not eligible to use the Pass-Through Business Alternative Income Tax Act.

Now that we’ve established who qualifies for this election, let’s talk about what it actually means. The business can pay a tax to the state of New Jersey at a certain percentage of their income (the percentage amount depends on the amount of the businesses income). For instance, for the first $250,000 of income, the business can pay a 5.675 percent tax. Whatever amount the business pays, the business owner can take that as a deduction on their federal business tax return reducing their profit which, in turn, reduces their personal federal income tax. Furthermore, the business owner can then take a credit of state tax paid on their personal N.J. tax return. This can end up greatly reducing the business owner’s federal taxable income!

Contact us to see if you should take advantage of this Act. To do so, the business owner must file a form to make the election, then the payment needs to be made by December 31, 2020, for cash basis businesses, and by March 15, 2021, for accrual basis businesses. While the rules are complex, Eiger, Lang & Company, CPA LLC is ready and able to help any of our clients who are interested in learning more about this new rule and how much they can save if they make this election!