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New Jersey enacts elective SALT cap workaround for pass-through entity members

Authored by Gary Peric, Donna Scaffidi and Frank Czekay

On Jan. 13, 2020, New Jersey Gov. Phil Murphy signed into law Senate Bill 3246, which enables pass-through entities (PTEs) to annually elect to be taxed at the entity level and permits a corresponding credit to partners and shareholders (“members”) of electing PTEs. The law is effective for tax years beginning on or after Jan. 1, 2020.

How it works:

PTEs that are allowed to make the annual election include entities treated as partnerships for federal income tax purposes, such as multimember limited liability companies and federal S corporations, with at least one member who is liable for tax on their distributive proceeds under the New Jersey gross income tax.

For New Jersey’s purposes, an electing entity’s member’s tax base will continue to be their share of distributive proceeds (income, dividends, gains) attributable to the PTE for the entire taxable year. A tax credit equal to a member’s pro rata share of the taxability incurred at the PTE can be applied against the member’s gross income tax liability. The credit is available to individuals as well as corporate PTE members.

Points to consider:

Prospectively, since an election is permitted annually, PTEs should assess whether making the election for the current year will result in a more tax-effective outcome for its members.

This election shall be made annually on or before the due date of the PTE’s return as established by the director and on forms prescribed by the director. We will update you as more information and forms related to the election become available.

Should you have questions regarding the New Jersey SALT cap workaround or any state tax matter, please contact a member of the Baker Tilly state and local tax team to ensure you are well prepared and in compliance.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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