Today New Jersey Governor Phil Murphy signed into law the Pass-Through Business Alternative Income Tax Act. This new law allows flow-through businesses in New Jersey to elect to pay income taxes at the entity level instead of at the personal income tax level. Since there is no limit on deductions on the federal level for state and local taxes paid by businesses, this new law stands to save New Jersey business owners an estimated $400 million annually. New Jersey Certified Public Accountants have been active in developing and promoting this legislation.
The new law potentially affects sole proprietors, partners, S corporation owners and so-called “gig workers”. The new law offers the possibility of converting your non-deductible state income tax from your personal return into a deductible business expense. There is no limit on the amount of deduction for state taxes paid by the business under the federal Tax Cuts and Jobs Act (TCJA). The limitation on deduction only at the individual income level. Currently, pass-through business owners can only deduct up to $10,000 in state and local taxes on their personal income taxes.
Of course, the amount of savings depends on your income and other circumstances. there isn’t a lot published on the new law for the obvious reason but The Pollack Firm in Lawrenceville put out this early analysis concluding a net $900+ annual savings for the example taxpayer used.
This is an optional tax planning tool available January 1, 2020. It makes sense to estimate the tax under both the old and the new optional method to compare the results. In many cases it will also make sense to make some business adjustments now to maximize benefit under the new law.
I am pleased to discuss the details and estimate the potential impact of this new law on your taxes this year.