Pass-Through Entity Bill Passes Senate Committee
December 10, 2018
An NJCPA-supported bill (S3246) that should save New Jersey business owners hundreds of millions of dollars without the loss of any tax revenues to the state passed the New Jersey Senate Budget Committee on Dec. 10.
NJCPA member Alan Sobel, CPA, provided the following testimony:
On behalf of the 14,000 members of the New Jersey Society of CPAs (NJCPA), I want to express our strong support for this critically important bill. This legislation should save New Jersey business owners hundreds of millions of dollars without the loss of any tax revenues to the state.
We greatly appreciate the outreach made by bill sponsor Senator Paul Sarlo and Senate President Stephen Sweeney to our group. They have sought our input every step of the way in the drafting of this legislation.
We all know the federal Tax Cuts and Jobs Act of 2017 essentially eliminated the ability for business owners to deduct state taxes on business profits. With a federal limit of only $10,000 for SALT deductions, the ability to reduce federal taxable income by state-level taxes assessed on business income is significantly curtailed. This result occurs because most of the individual federal limit is will be used up by real estate taxes or taxes on non-business income. Up until the adoption of the 2017 federal legislation, state or local taxes imposed on a business’s income would be deductible in computing federal taxable income.
In a nutshell, by modernizing the New Jersey tax structure, this bill allows pass-through business entities to pay income taxes at the entity level instead of the personal level. This is a key distinction because the federal Tax Act does not place a cap on the deduction of state taxes assessed and paid at an entity level.
Pass-through businesses include S corporations, partnerships and various forms of limited liability companies. Generally, the income from these companies is passed on to the owners and taxed at the individual level for federal and state purposes. This bill will provide for state taxes to be assessed at the entity level thereby making it deductible in computing federal taxable income. And, to ensure that New Jersey taxpayers do not pay any more state taxes than current New Jersey laws provide, the legislation provides a full credit to the owners who would otherwise also pay tax at the individual level.
The implementation of this bi-partisan bill could reduce the net effective tax rate for New Jersey businesses by as much as one third. Over the long run, this bill should save New Jersey business owners hundreds of millions of dollars. What a powerful message this legislation sends to businesses owners while also offering competitive advantages to our state and those who own and conduct businesses here.
Once again, we strongly support this bill and urge the honorable members of this committee to support its passage.