Since the state of New Jersey initiated the Business Alternative Income Tax or BAIT program for the 2020 tax year the flood gates have been opened. The AICPA has reported that as of August 31, 2022 twenty nine states have enacted Pass-Through Entity Tax Legislation (PTET – as its become more commonly known) while three other states have proposed tax legislation. Those three in the proposed staged are PA, IA, and VT. None the less this can be a windfall for many business owners of partnerships, multi-member LLCs, or S-Corporations with the right mix of profits to utilize the legislation to their advantage.
Of course each State’s law differs from the next as one would expect which is why its important to consult your tax professional – things to be conscious of:
Although NJ was an early adopter in 2020 to this type of legislation, other states like Colorado have made their statutes retro-active to 2018. While others like North Carolina and Georgia made their laws effective in 2022.
Keep in mind many states have made it that a taxpayer must make an election to be eligible to participate in the programs and these elections have deadlines so make sure you talk to your tax provider to make sure all elections have been filed timely. Note CT is one state that has made their PTET program Mandatory for eligible businesses.
For those that are unfamiliar PTET programs like the NJ BAIT they generally allow business owners the opportunity to elect to pay an income tax from their pass-through business entity. Businesses structured as Partnerships and S-Corporations are pass-through entities and eligible for this election. The Internal Revenue Service has confirmed they will honor such payments made as deductions on the businesses’ federal tax returns. Owners of the pass-through entities can then take credit for the taxes paid via their business entity on their New Jersey personal tax return. These programs are being implemented to help business owners lessen the negative impact of the federal state and local tax (SALT) limitation enacted in 2018 by the IRS.
Its not too late to make 2022 elections in some states and its never too late to start your 2023 planning to make sure elections are made on time. Multi-state taxpayers should stay keenly aware as they may need to track the timing and differences across several states to make sure these programs become part of a complete tax strategy and as usual Levine Jacobs is here to help.
Charles F. Ott, MBA/CPA