The cap is likely the most controversial component of the federal tax overhaul approved by the GOP-controlled Congress and President Donald Trump at the end of 2017, as it limits how much residents in high-tax states like New Jersey can write off from their state income and local property taxes.

TRENTON — New Jersey lawmakers are in a race against the calendar to approve legislation intended to protect thousands of small business owners from having to pay higher taxes due to a cap on the federal deduction for state and local taxes.

The legislation, known as the “Pass Through Business Alternative Income Tax Act,” is designed to protect so-called pass-through businesses and partnerships that pay taxes through their owners’ personal income returns rather than corporate taxes from the federal government’s controversial $10,000 cap on state and local taxes deductions, also known as SALT.

The cap is part of the federal tax overhaul approved by the GOP-controlled Congress and President Donald Trump at the end of 2017, and limits how much residents in high-tax states such as New Jersey can write off from their state income and local property taxes.

In order to protect pass-through businesses, which were previously able to deduct all their state and local taxes in their owners’ federal returns, the legislation would reclassify those businesses’ income tax payments as an “elective entity-level tax” rather than personal income. By doing so, those businesses still will be able to write off the state income tax payment because the federal tax law’s $10,000 cap does not apply to business taxes.

Based on recent IRS statistics, the proposal is expected to protect some 260,000 individuals and families in New Jersey that reported some $23 billion in income from pass-through businesses and partnerships.

The proposed workaround has received bipartisan support in the Legislature. Sen. Troy Singleton, D-7th of Delran, was a prime sponsor of the bill in the Senate, where it was approved by a 40-0 vote last December. The bill still needs to clear the Assembly and receive Gov. Phil Murphy’s signature to become law, and its supporters warn that time is running out for the legislation to get approved and implemented in time to aid business owners for the 2019 tax year.

William Love, an accountant from Medford who has pressed state lawmakers to approve the fix, said it’s likely already too late to implement the change for the 2018 tax year filings. And he warned that business owners might be feel the SALT cap sting in 2019 if the legislation isn’t approved soon.

“2018 is gone. We want to make sure it gets done in 2019 so it’s not an administrative nightmare,” Love said Tuesday. “You don’t want to go too far into 2019 without (the New Jersey) Treasury setting it up.”

Love and other supporters said they were encouraged by Monday’s 9-0 vote by the Assembly Appropriations Committee to advance the legislation for a floor vote by the full Assembly, possibly as early as next week.

“It’s still important to get this done tout de suite,” Love said.

Business advocates have also pressed for action by the Legislature. Last month, leaders with the New Jersey Business and Industry Association, the New Jersey Chamber of Commerce and the New Jersey Society of CPAs sent a letter to Assembly Appropriations Chair John Burzichelli, D-3rd of Paulsboro, describing the measure as a “win-win” for New Jersey, since it would lose no revenue from the change but save business owners at least $400 million on their federal taxes.

“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 in our state,” wrote Alan Sobel, a Livingston CPA, in testimony submitted to the Appropriations Committee.

Assemblyman Anthony Bucco, R-25th of Boonton, who is a prime sponsor of the measure in the the Assembly, also described it as a critical measure to help small businesses in the state.

“We should be making every effort to make New Jersey small-business friendly, and this change will provide much needed relief for many of New Jersey’s job creators,” he said.

The legislation amounts to a second try by lawmakers seeking to blunt the impact of the federal tax law’s SALT cap. Last year, Murphy and lawmakers also approved legislation allowing towns, counties and other local governments to establish charitable funds that homeowners can contribute to in return for property tax credits equal to 90 percent of what they gave.

The funds are intended to be used to pay for government services normally funded by property taxes. Homeowners who contribute were expected to be able to write off the full amount of those contributions on their federal tax returns because the new tax law kept in place an uncapped deduction for charitable contributions.

But few if any local governments in New Jersey have followed through with creating the charitable funds, in large part because the IRS created regulations to block residents from using charitable contributions as a federal write-off if they received a state or local tax credit in return.

Supporters of the small-business legislation have said they believe it can survive IRS scrutiny because New Jersey previously taxed pass-through businesses in the same way for decades.

Original Article