Senator PAUL A. SARLO
District 36 (Bergen and Passaic)
Senator STEVEN V. OROHO
District 24 (Morris, Sussex and Warren)
Senators Singleton, O'Scanlon and Testa
Revises calculation of elective pass-through business alternative income tax.
CURRENT VERSION OF TEXT
An Act concerning the elective pass-through business alternative income tax, amending Title 54A of the New Jersey Statutes.
Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. Section 2 of P.L.2019, c.320 (C.54A:12-2) is amended to read as follows:
2. As used in P.L.2019, c.320 (C.54A:12-1 et al.):
"Direct share of the tax paid" means the portion of pass-through business alternative income tax calculated on the distributive proceeds that is also included in the gross income of a member of the electing pass-through entity pursuant to the “New Jersey Gross Income Tax Act,” N.J.S.54A:1-1 et seq.
"Director" means the Director of the Division of Taxation in the Department of the Treasury.
"Distributive proceeds" means all items of income, gain, loss, or deduction of a pass-through entity to the extent the amounts are included in the New Jersey gross income as set forth in N.J.S.54A:5-1 [the net income, dividends, royalties, interest, rents, guaranteed payments, and gains of a pass-through entity, derived from or connected with sources within the State, and upon which tax is imposed and due on a member of the pass-through entity pursuant to the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq., in a taxable year]. For a nonresident, this means New Jersey source income as set forth in N.J.S.54A:5-8.
"Limited liability company" means an entity organized pursuant to the "Revised Uniform Limited Liability Company Act," P.L.2012, c.50 (C.42:2C-1 et seq.), or prior law providing for the formation of a limited liability company in this State, or formed as a limited liability company under similar statutes of other states, that is classified as a partnership or an S Corporation for purposes of federal income tax law.
"Member" means a shareholder of an S corporation; a partner in a general, limited, or limited liability partnership; or a member of a limited liability company.
"Partnership" means a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on in this State.
"Pass-through business alternative income tax" means the tax set forth in subsection b. of section 3 of P.L.2019, c.320 (C.54A:12-3).
"Pass-through entity" means a partnership, an S corporation, or a limited liability company, with at least one member who is liable for tax on distributive proceeds pursuant to the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq., in a taxable year.
"Share of distributive proceeds" means the portion of distributive proceeds attributable to a member of a pass-through entity in a taxable year.
"Taxable year" means the same as in N.J.S.54A:1-2.
"Taxed at the business entity level" means taxed pursuant to an election made under P.L.2019, c.320 (C.54A:12-1 et al.).
(cf: P.L.2019, c.320, s.2)
2. Section 5 of P.L.2019, c.320 (C.54A:12-5) is amended to read as follows:
5. a. Except as otherwise provided in paragraph (3) of subsection b. of section 3 of P.L.2019, c.320 (C.54A:12-3), a taxpayer shall be allowed a refundable gross income tax credit, pursuant to the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq., if the taxpayer is a member of a pass-through entity that elects to owe and pay the pass-through business alternative income tax determined pursuant to section 3 of P.L.2019, c.320 (C.54A:12-3) for the taxable year.
For each pass-through entity of which the taxpayer is a member, the amount of the credit shall equal the member's [pro rata] direct share of the tax paid pursuant to section 3 of P.L.2019, c.320 (C.54A:12-3), which credit shall be applied against the gross income tax liability of the member in the taxable year.
b. The credit allowed by this section shall be available after the application of all other credits allowed by law and claimed by the taxpayer in the taxable year.
c. For a taxpayer that applies the credit available pursuant to this section to the tax due pursuant to N.J.S.54A:1-1, if the credit exceeds the amount of tax otherwise due, that amount of excess shall be an overpayment for the purposes of N.J.S.54A:9-7; provided however, that subsection (f) of N.J.S.54A:9-7 shall not apply.
d. The credit allowed to any trust or estate pursuant to this section may be allocated to beneficiaries or be used against the tax liability of the estate or trust, in accordance with rules and regulations adopted by the director.
(cf: P.L.2019, c.320, s.5)
3. This act shall take effect immediately and apply retroactively to taxable years beginning on and after January 1, 2020.
This bill revises how to calculate the elective pass-through business alternative income tax.
Currently, when a pass-through entity chooses to pay the business alternative income tax, the pass-through entity’s tax is calculated based on the portion of the entity’s income that is derived from business conducted in New Jersey. The owners of the entity are then allowed a gross income tax credit based on the amount of tax the entity paid. Because the tax is calculated using only the entity’s income derived from New Jersey, the tax is sometimes lower than it otherwise may be and therefore the entity’s owners’ tax credit is lower than it may otherwise be.
Under this bill, for owners of the entity that are New Jersey residents, the pass-through entity’s tax is calculated based on all income of the entity as long as the income would be taxable under the gross income tax. Resident owners of pass-through entities will therefore be able to obtain a larger gross income tax credit. For owners of the entity that are non-residents, the pass-through entity’s tax will continue to be based on income derived from business conducted in New Jersey.
The changes made by this bill will apply retroactively to taxable year 2020, the first year that the elective pass-through business alternative income tax was in effect.