THE WANDERING TAX PRO
Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 45+-year veteran tax professional Robert D Flach.
The new alternative tax election is
effective for taxable years of the pass-through entities beginning on or after
January 1, 2020.This does not affect
2019 tax returns.
This is clearly another attempt by NJ
to work around the federal $10,000 state and local tax (SALT) itemized deduction
limitation enacted by the GOP Tax Act by changing a (perhaps) non-deductible individual income tax into a (hopefully) deductible state business income tax.
The first attempt failed.In May of 2018 Murphy signed legislation that
would allow a taxpayer to donate to a charitable fund established by their
municipality, county or school district. In return for their donation, the
taxpayer would receive a credit on their property tax bill of up to 90 percent
of the donation.The assumption was the
taxpayer could deduct the full amount of the donation as a charitable
contribution on Schedule A, effectively providing a back-door deduction for the
property tax.The IRS was quick to point
out that any deduction for a contribution to such a charitable fund must be
reduced by the amount of the property tax credit received under the federal
Trump (new synonym for “quid pro quo”) rule.Only 10% of the donation is allowed as an itemized deduction.
I am not sure what the practical
implementation of this new law on NJ tax returns will look like.While NJ partnerships and S-corporations
already file a tax form on which they can elect to pay the tax, will sole
proprietors who file a federal Schedule C now have to file a new separate NJ
business tax return to pay the tax?
From what I have found in an initial online
search the tax the pass-through entity will pay is -
1) 5.525% tax on the first $250,000 of distributive
2) 6.37% tax on distributive proceeds between
$250,000 and $1M 3) 8.97% tax on distributive proceeds
between $1M and $3M 4) 10.75% tax on distributive proceeds
The above tax rates mirror the higher end of
the current NJ tax rates for Form NJ-1040.
I will be interested to see how the
IRS responds to this new attempt to help NJ taxpayers evade federal
income tax.It is clear what NJ is
doing, and the Service will certainly understand this. I would think in order for this scheme to work
NJ would have to make the entity-level tax mandatory and not optional
and exempt from taxation on the NJ-1040 the pass-through income from NJ-based
partnerships, sub-S corporations and net profits from business (federal
I will certainly to have more to say
about this new tax scheme after the tax filing season when more information