Before 2018, individuals were allowed an unlimited deduction for state and local taxes, such as income taxes and real estate taxes, in computing their Federal tax liability. As has been well publicized, the Tax Cuts and Jobs Act signed into law December 2017 has limited this deduction to ten thousand dollars ($10,000), starting with the 2018 tax year.

States have been attempting to help individuals get around this limitation by shifting the liability for state taxes from individuals to entities that are not subject to this limitation. Toward this end, on January 13, 2020, New Jersey enacted the “Pass-Through Business Alternative Income Tax Act.” This Act is effective as of the 2020 tax year.

Pursuant to this Act, entities such as partnerships and S corporations can elect to pay tax with respect to their New Jersey source income. The partners and shareholders would also have to report this income on their New Jersey returns; however, they would receive a tax credit equal to the amount of tax paid by the entity multiplied by their respective ownership percentage. The net result would be that a partner’s or shareholder’s New Jersey tax liability with respect to this income would remain the same. However, because the New Jersey tax liability was paid by the entity, and not the individual, the ten thousand dollar ($10,000) deduction limitation would not apply, thereby most likely reducing their Federal tax liability.

For a calendar year entity, an electing entity would have to make its first estimated tax payment by April 15, 2020. It is anticipated that New Jersey will publish Forms, and issue guidance, regarding both calculating this payment and continuing compliance with the Act.