What Is the New Jersey BAIT Tax?

The New Jersey Business Alternative Income Tax, also known as NJ-BAIT, first came into effect on January 1, 2020. However, many business owners are unsure of exactly what BAIT is, what its implications are for them, and how it can save their business money.

In today’s post, we have attempted to demystify BAIT, explain how it is calculated, and show you how you can benefit from it as a business owner in New Jersey.

What Is the New Jersey Business Alternative Income Tax (NJ-BAIT) ?

The NJ-BAIT was put in place to mitigate the negative impact of the $10,000 federal limit on the deductibility of state and local taxes (SALT), which was enacted as part of the Tax Cuts and Jobs Act (TCJA) in 2017. Under the TCJA, this limit applies only to the dedication of state taxes paid at the individual level, not at the entity level.

In New Jersey, the income and losses of a pass-through entity are passed through to its members for tax purposes. A pass-through (or flow-through) entity is a partnership, multimember limited liability company (LLC), or S corporation that is not liable for income tax; instead, the income is reported on the individual tax returns of investors, shareholders, or owners. Though sole proprietorships are technically pass-through entities, they are not BAIT-eligible.

Pass-through entities are completely legal and can have significant tax benefits, including eliminating the problem of double taxation, which occurs when income is taxed on both a corporate and an individual level.

However, for taxable years beginning on or after January 1, 2020, pass-through entities may optionally choose to pay a Pass-Through Business Alternative Income Tax due on each individual partner’s share of income. These individuals may then claim a refundable tax credit for the amount of tax paid by the pass-through entity, which will offset one’s personal gross income tax owed to the state of New Jersey.

Opting into BAIT allows the owners of a pass-through entity to reduce their federal income by an amount corresponding with the amount of BAIT paid because that amount has been deducted from the owners’ taxable distributive share from the pass-through entity.

Pass-through entities must elect to pay BAIT no later than the 15th day of the third month “following the close of the tax year,” which is generally the original due date of your business tax return without any extensions. Therefore, if your tax year is the same as the calendar year, March 15 is your deadline to opt into BAIT. BAIT is completely optional, but we recommend discussing its implications with your accountant to decide whether it is right for you. BAIT is estimated to save NJ business owners a total of between $200 million and $400 million annually.

What Is the NJ-BAIT Tax Rate?

As of January 2022, income in excess of $1 million is taxed at 10.9%. This is a slight increase on the previous rate; before2022, income exceeding $1 million but under $5 million was taxed at 9.12%, and only income over $5 million was taxed at 10.9%.

Income up to $250,000 is taxed at 5.675%, and income from $250,000 to $1 million is taxed at 6.52%.

How Is BAIT Calculated in New Jersey?

BAIT is calculated on every New Jersey resident partner or member’s share of distributive proceeds. (As of 2022, this includes income sourced from outside New Jersey—see “2022 Changes to NJ-BAIT” below for more details.)

2022 Changes to NJ-BAIT

Though they’ve been in place since January 2020, the BAIT laws are still being reviewed and updated. Several changes to NJ-BAIT were implemented in 2022:

  • The threshold for paying the highest BAIT rate was lowered from $5 million to $1 million.
  • BAIT will now be calculated on all income earned by partners or LLC members that are individuals, estates or trusts, and residents in New Jersey, as opposed to only NJ-sourced income. This will allow those individuals to enjoy a much more significant federal income tax benefit. The exception to this rule is BAIT for S corporations, which will continue to be based solely on New Jersey-sourced income.
  • BAIT no longer requires a partnership (or an LLC taxed as a partnership) to withhold New Jersey gross income tax on behalf of a partner or member who is not resident in New Jersey and who reasonably expects to be refunded such a withholding via BAIT credit.

Learn More

Here at Levine, Jacobs & Co, we have been providing accountancy services to New Jersey’s business owners since the 1950s. Our founder believed in giving personal, individualized attention to every client, and that philosophy remains at the core of how we operate today.

If you would like to learn more about NJ-BAIT, how it impacts your business, or how you can make use of it to reduce your tax liability and avoid double taxation, please contact any member of our team, who will be pleased to advise you.

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