On Monday, January 13, 2020, New Jersey Governor Phil Murphy signed a state and local tax cap (“SALT Cap”) workaround that mitigates the effects of the federal SALT Cap imposed by the Tax Cuts and Jobs Act (TCJA) on the state’s small business owners and gives them a potentially beneficial income tax break.
The SALT Cap workaround bill (also known as the Pass-Through Business Alternative Income Tax Act), goes into effect immediately for the 2020 tax year.
The TCJA of 2017 imposed a federal $10,000 cap on state and local income tax deductions. This greatly impacted smaller businesses – especially those located in high-tax states like New Jersey.
The SALT Cap workaround now affords certain business owners a measure of relief by offering them the opportunity to pay a portion of their state taxes through their businesses. Essentially, the bill allows pass-through businesses including S-corporations, limited liability companies (LLCs), partnerships, and sole proprietorships, to pay their state income taxes at the corporate level versus the individual level. In other words, the workaround allows business owners of these types of organizations the flexibility to pay their state taxes as part of their business expenses. There is no cap as the TCJA’s SALT Cap pertains only to tax deductions at the individual level. New Jersey’s legislation then awards a tax credit to pass-through business owners at the individual level for the taxes paid through their business.
The new legislation is particularly good news for small business owners and, at the same time, is revenue neutral for New Jersey. It is particularly helpful to S-corporations and professional services firms such as law and accounting firms, as well as medical practices operating as LLCs which, according to the Senate Democrats Office, comprise nearly 300,000 businesses in the state.
If you have questions about New Jersey’s SALT Cap workaround, whether or not the new legislation pertains to your business, or how it may affect the manner in which you pay your business taxes, please contact your Untracht Early advisor.