The Latest on NJ BAIT and PTE Filings
To rectify the implementation issues with New Jersey’s Business Alternative Income Tax (BAIT), a clean-up bill was drafted which has passed the New Jersey Legislature and now awaits Governor Murphy's signature. The bill, which is supported by the NJCPA, includes the following changes which would be affective Jan. 1, 2022:
- It would modify how the optional tax is calculated so that more income is subject to the tax, thereby allowing a larger credit to be obtained for paying the optional tax.
- It would change the offsetting tax credit structure and permitted uses of the credits so that the credits are more generous.
- The tax brackets would be updated for the BAIT to better align with the most recent changes to the state’s gross income tax brackets
- The treatment of overpayments of tax and excessive credits would be modified so that they can be applied to tax liability in the successive year.
The bill also provides that entities would not be required to make a payment on the share of the income of each nonresident entity owner if the entity owner expects to get the money back in the form of a tax credit as a result of the entity paying the optional entity-level tax.
The bill passed the the New Jersey Legislature on Jan. 10 and now awaits Governor Murphy's signature. If he doesn't sign by Monday, Jan. 17, the bill will automatically be vetoed and will need to be re-introduced in the next two-year legislative session. We will provide updates as they become available.
Apportionment of income
Additionally, we've received a few questions about the state changing the method of apportioning income of an S corporation from the three-factor formula to the single-factor formula.
We just received word from the Division that, for tax year 2021, an S corporation will have the option to use three-factor on NJ-NR-A for purpose of the BAIT.
The Division's website guidance regarding important BAIT updates for tax year 2021 will be posted shortly. Please check back with the Division's website periodically.
Practitioner assistance and links
For reference, below is correspondence the NJCPA sent to the New Jersey Division of Taxation last March as the BAIT was initially rolled out. It outlines the issues we raised, which led to the clean-up legislation that is currently working its way through the New Jersey Legislature.
March 3, 2021
We are writing to address serious concerns raised by many New Jersey Society of CPAs (NJCPA) members and their clients with respect to the interpretation and implementation of the Business Alternative Income Tax (BAIT).
It is clear that the BAIT is a very successful piece of legislation that provides significant support to business owners in the state of New Jersey. According to a recent article on NJ.com, the state has already received approximately $1.2 billion in payments through January 2021. This amount collected to date alone will save New Jersey business owners an estimated $240 million in federal taxes. Since the initially scheduled filing deadline is March 15, 2021, we suspect New Jersey will continue to collect substantially more BAIT taxes, further helping business owners. Given the impact of COVID-19 on small New Jersey businesses, we are sure everyone can agree that this tax relief, which does not cost the New Jersey Treasury a single dollar in lost revenue, is of critical importance.
Notwithstanding the current success of the legislation, many of the benefits taxpayers are expecting could be curtailed unless urgent and important implementation changes are made to certain positions contained in the rollout of the legislation by the New Jersey Division of Taxation. The following is a synopsis of these issues:
Calculating the Tax
Through the release of the specimen BAIT tax form, PTE-100 and its instructions (which, as of this letter, have not been finalized), the Division has taken the position that the BAIT should be based on federal taxable income versus the taxable income that a flow-through entity would report to an individual for the GIT.
Under N.J.S.A. 54A:12-2: “‘Distributive proceeds’ means 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.” (Emphasis added.)
Based on the reading of the Statute and a clear legislative intent to utilize the same tax base for BAIT as the NJ GIT, it would seem apparent that taxable income of the BAIT should mirror the calculation of taxable income consistent with forms NJ 1065 or CBT100S.
However, the specimen PTE-100 begins with federal ordinary income and does not provide any adjustments for such items as bonus depreciation, out-of-state municipal interest, meals and entertainment and the deduction of the BAIT itself. These are the common differences between federal and New Jersey taxable income that business owners and tax practitioners are accustomed to adjusting when filing business tax returns. Furthermore, the non-add-back of the BAIT deduction, in and of itself, results in a circular-type calculation that results in a different BAIT amount each time one calculates the tax.
The Division has indicated that they interpret the statute by stating N.J.S.A. 54A:12-2 tracks N.J.S.A. 54A:5-1 which would lend itself to a straightforward definition similar to “ordinary income” that did not include various add backs and deductions.
With due respect to the Division, this makes no sense as no income tax base in New Jersey ends with federal “ordinary income.” The legislative intent was to as closely align the tax basis to the GIT as possible and to maximize the federal deductibility of state taxes paid by business entities.
The Division acknowledges that they understand the concerns that have been brought forward and will consider changes for 2021.
We don’t think this fix can wait, and the law should be implemented correctly in the initial year. Failure to make appropriate implementation changes will have a negative impact on many taxpayers and result in unexpected results as the BAIT will be lower than anticipated by those who interpreted the law in advance of the Division’s instructions in late December. Furthermore, GIT taxes, net of credits, will be higher than contemplated by the construct of the legislation. This results in lost benefits from a lower federal deduction, and taxpayers who want to avail themselves of the BAIT may have higher GIT taxes because of a lower BAIT credit. This could subject taxpayers to unexpected interest and penalties.
Needless to say, these results would frustrate many taxpayers and diminish the benefits that could be obtained from this popular pro-business initiative advanced by the state.
The second issue results from the Division’s FAQ interpretation of BAIT payments made in tiered entity structures. The FAQ sets forth:
How will the Pass-Through Business Alternative Income Tax apply for tiered partnerships?
A tiered partnership will claim a credit for the amount of tax paid by the pass-through entity on its share of distributive proceeds on Form NJ-CBT-1065. The credit will not flow directly through to the tiered partnership’s partners.
Note: If a New Jersey S corporation is a partner in a tiered partnership, the New Jersey S Corporation will claim a credit for the amount of tax paid by the pass-through entity on its share of distributive proceeds on Form CBT-100S. The credit will not flow directly through to the S corporation’s shareholders.
According to the Division, N.J.S.A. 54A:12-5 allows the credit for taxpayers that are a member of a PTE that elects to owe and pay BAIT. Per the Division, under the strictest reading of the statute, the tier is the electing and paying partner. Therefore, the credit will not flow directly through to the tiered partnership’s partners or the S corporation’s shareholders.
While we respect the strictest reading of the statute, this reading also does not take into account the legislative intent of ensuring that the ultimate GIT taxpayer benefits from the BAIT taxes paid on its behalf, regardless of the where the level of payments are actually made. It also defies reason that the legislators intended that non-individual owners of a tiered structure would have to pay the tax in multiple levels in order to secure the benefit, while then waiting to receive a refund.
The Division notes the concerns that have been raised and is considering the recommendation for providing a remedy for the duplicative tiered-payment issue. However, the Division feels this may require a legislative change.
The statute specifically grants the Director “those powers as the director deems necessary to apply to a pass-through entity for the reporting, payment, collection, administration, and enforcement of the tax imposed.” As a result, we believe the Director should use his powers to interpret the legislative intent of the tax and permit the flow-through of the credit of each tiered entity to offset the entity’s BAIT payment. This will avoid unnecessary duplicate payments and reduce the frustration of taxpayers that would wind up with multiple payments for the same tax and then have to wait to receive refunds from New Jersey for the excess taxes being paid from the various tiers.
Finally, the deadline for the election, extension and payment of the BAIT tax is March 15, 2021. As of the date of this letter, the Division has not released a final version of the PTE-100 and instructions. In addition, most tax software packages that tax practitioners use have not issued updates with any of the NJ BAIT returns. Many of our members are very concerned about how to properly calculate the tax based on different interpretations of the Statute and the ability to get any of this accomplished by the March 15 deadline with less than two weeks to go.
Summary and NJCPA Recommendations
As set forth above, there are three key issues with the implementation of the BAIT that require immediate attention:
- The calculation of the tax using federal ordinary income as currently presented in the forms and instructions should be modified to incorporate adjustments and more closely align to New Jersey taxable income under the Gross Income Tax rules;
- The payments of BAIT made in tiered structures should be permitted to be applied against the BAIT of a partnership or Sub S corporation member in tiered structures as opposed to the current guidance not permitting such application and requiring a refund; and
- With less than thirteen days until the March 15 deadline and the forms not officially available, taxpayers and practitioners (including the tax software companies) do not have adequate time to digest and implement the BAIT filings.
We believe all the information above requires careful consideration, and the timing is at a point that it likely can’t be accomplished before March 15. Therefore, we recommend the following for consideration:
- The Director of the Division of Taxation should grant an automatic extension of time to file the PTE-100 and make the payment of the BAIT tax to June 15, 2021. If an extension is not possible, an acceptable alternative would be to issue a directive that penalties and interest will be waived for the underpayment of BAIT tax through June 15, 2021, including first-quarter estimated payments.
- If helpful, a working group of the Division, along with NJCPA representatives, Treasury officials, the Governor’s office and interested lawmakers, should meet to discuss these BAIT issues and work toward an appropriate resolution.
- If necessary, the NJCPA and Division should work with the Legislature to effectuate any legislative changes that would be required and hopefully make those changes effective Jan. 1, 2020.
We would welcome the opportunity to speak with you about these issues and work collectively toward the resolutions that will ensure the full effect and benefits this nation-leading legislation was intended to provide.
March 11, 2021
On behalf the New Jersey Society of CPAs membership and New Jersey taxpayers, we would like to express our appreciation of the postponement of filing form PTE-100 until April 1, 2021. While this does provide two weeks to digest the forms that have now been posted on the Division of Taxation website, and hopefully allow the tax software companies time to update their programs, we respectfully request further consideration for a filing date of June 15, 2021.
As we have previously communicated, there are several reasons that the due date for this year should be postponed until June:
- As recently as March 10, the PTE-200 has had some issues. When accessing the PTE-200 online, the original due date of the PTE-100 is listed as 4/15/2021, which is causing confusion. (see screen shot below)
- It is not clear from the guidance on whether the April 1 date applies only to those taxpayers who will file the completed PTE-100 by April 1 or if an extension and payment is still required by March 15 if the PTE-100 will be filed after April 1. Even if a further postponement is not granted, this should be clarified to indicate the extension or filing along with payment are not due until April 1.
- The issue of the use of federal tax basis in computing the BAIT has not been resolved. This leaves the taxpayer in the best-case scenario with a circular calculation. In the worst-case scenario, it results in a lower BAIT tax amount than the taxes required on the NJ-1040 strictly because federal taxable income could be lower than New Jersey’s taxable income from the same business. As we presented in prior communications, we believe this treatment is inconsistent with the Statute and hurts New Jersey business owners. A postponement of the due date to June 15 will provide sufficient time to sort this issue out.
- We acknowledge that the issues presented with tiered structures may not be resolved for the 2020 tax year, but there is still a lot of confusion over this issue that needs to be sorted out by taxpayers, and perhaps the additional time will allow the matter to be resolved to everyone’s satisfaction.
- A June 15 deadline will not impact the budget year because the payments will need to be made before the June 30 end of the fiscal year.
The NJCPA is being inundated with questions from members about the issues outlined above, and we’re sure the same is true at the Division of Taxation. We remain ready to meet with all parties to bring this to a quick resolution, but we don’t believe this can be accomplished by April 1 and provide sufficient time for taxpayers to appropriately digest any changes to file accurate returns.
We look forward to working toward effective solutions that represent the best interests of all stakeholders in this beneficial legislation that benefits thousands of New Jersey small business owners.
March 18, 2021
Thank you again for your attention and helping with our concerns about the implementation of the Pass-Through Business Alternative Income Tax. In addition to the items raised in our letter of March 11, 2021, we have identified another issue after reading, at your suggestion, the minutes of the NJCPA Director’s meeting of Jan. 28, 2021. The additional item relates to number 9 on the agenda that is reflected as follows in the minutes:
Business Alternative Income Tax
Please confirm that a NJ S Corporation will not be limited in the credit it can claim if its distributive BAIT credit exceeds its tax liability. Per N.J.S.A. 54:10A-5.43(f), where a “corporate member” would be limited, but a “corporate member” is defined to only include member that is NOT an individual, estate, or trust subject to the GIT, and that a corporate member does not include another pass-through entity.
JB – A NJ S Corporation is limited in the credit it can claim if its distributive BAIT credit exceeds its tax liability. The opening paragraph of N.J.S.A. 54:10A-5.43 contains a minimum tax restriction whereby the CBT taxpayer cannot reduce its current year tax liability below the minimum tax. N.J.S.A. 54:10A-5.43 does not differentiate between a CBT taxpayer that is a C corporation and a CBT taxpayer that is a New Jersey S corporation. The credit has a 20 year carry forward. The Division believes the Society’s suggestion would require a legislative change.
In an email to Janine Burgess on Dec. 24, 2020, we outlined what we believe is the correct interpretation of the Statute in No. 9 above. The following is an updated excerpt from that email (highlight and emphasis added by us):
We believe that the language of the statute provides for the credit to flow through from the partnership, to the S corporation to either be credited against the S corporation’s own BAIT if it made its own election or result in a refund by the S corp if it did not make its own BAIT election.
C.54:12-2 is a definitional section for purposes of the BAIT. That section states that a “Pass-Through Entity” means a partnership, an S Corporation, or a limited liability company…”
C.54:10A-5.43 (11) “Tax credit for certain corporate member.” This says in part:
“Where the pass-through entity, which pays the pass-through business alternative income tax, is owned by both corporate members and non-corporate members, the corporate member shall be allowed a tax credit against the surtax imposed pursuant to section 1 of P.L.2018, c.48 (C.54:10A-5.41) or the tax imposed under paragraph (1) of subsection c. of section 5 of P.L.1945, c.162 (C.54:10A-5), if the corporate member 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; provided, however, the credit shall not reduce the corporate member’s tax liability below the statutory minimum imposed under subsection e. of section 5 of P.L.1945, c.162 (C.54:10A- 5). Any excess credit shall be carried over for a period of up to 20 privilege periods.”
Subparagraph a. provides:
“For each pass-through entity of which the corporate member is a member, the amount of the credit shall equal the member’s 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 surtax or corporation business tax liability of the member during the member’s privilege period.”
Subparagraph f. provides:
“For the purposes of this section: “Corporate member” means a member that is not an individual, an estate, or a trust subject to taxation pursuant to the “New Jersey Gross Income Tax Act,” N.J.S.54A:1-1 et seq., that is not a corporation exempt from the Corporation Business Tax Act pursuant to section 3 of P.L.1945, c.162 (C.54:10A-3). A corporate member does not include another pass-through entity.”
As a result, the language cited above in C.54:10A-5.43 (11) “Tax credit for certain corporate member.” does not seem to apply to an S Corporation since that is considered a pass-through entity pursuant to C.54:12-2 cited above and a “corporate member” is not “another pass-through entity.” pursuant to C.54:10A-5.43 (11)(f) cited above.
Moreover, the Division’s website FAQ under “Calculation the Tax” states:
How will the Pass-Through Business Alternative Income Tax apply for tiered partnerships?
It seems that if the S corporation makes its own BAIT election, it should be able to take a credit against its own BAIT, otherwise there would be a double tax on income. If on the other hand, the S corporation does not make its own BAIT election, it seems that the BAIT paid on its behalf should be passed down to its shareholders. If not, the BAIT paid on its behalf would be wasted and unused, in effect again creating a double tax, which seems inconsistent with the legislative intent.
In fact, C.54A:12-5.a. provides, “For each pass-through entity of which the taxpayer is a member, the amount of the credit shall equal the member’s pro rata 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…”
Thus, the intent seems clear that the BAIT payment should be applied by the member against the tax liability as you move down the tiered structure.
Please add this issue to the list of matters that we would like to work with you and the Division on to ensure the complete and successful implementation of the BAIT tax.