BAIT Taxes (SALT Workaround Approved by IRS)

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Ajay Kumar, CPA, MBA

The Business Alternative Income Tax (BAIT Tax) was passed to give pass-through entities (Partnerships, LLC and S-Corp) business owners a workaround to the SALT $10K cap on state and local tax deductions imposed by the Tax Cuts and Jobs Act. This helps business owners mitigate the negative impact of the federal SALT deduction cap. It’s estimated to save New Jersey business owners almost $400 million annually and it won’t cost the state anything because it’s revenue-neutral for the state.

The bill allows the business owners to pay a business alternative income tax (BAIT) and receive a refundable tax credit against their own personal income tax liability i.e. effectively treating the state tax obligation as a business expense.

Effective for tax years beginning on or after January 1, 2020, the legislation gives the state’s S-corporations, partnerships, and limited liability companies (with more than one member) the option to elect a pass-through entity tax rate between 5.675% and 10.9% based on pass-through income. The members then receive a credit against their gross income tax equal to each member’s share of distributive proceeds paid by the pass-through entity. The tax rate is determined by the following thresholds:

Single-member limited liability companies and sole proprietorships may not elect to pay the Pass-Through Business Alternative Income Tax. I would like to emphasize that each person’s situation is different so it’s important to fully consider your specific situation before deciding what sort of expenses you can claim. For more information, please check:

https://www.irs.gov/pub/irs-drop/n-20-75.pdf

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