Gov. Phil Murphy approved a bill that would allow owners of certain businesses to pay some of their state taxes through the businesses they own — a measure proponents say will soften the impact of the $10,000 federal cap on state and local property tax deductions.
Formally called the “Pass-Through Business Alternative Income Tax Act,” the measure’s approval comes as New Jersey and other states challenge the federal cap, which they argue is a political move by the Trump administration and Republicans to target higher-tax states, such as New Jersey.
A measure is working its way through Congress that would lift the cap, but the future of that legislation is far from certain. The U.S. House of Representatives approved the bill in December along party lines.
Last year, Murphy and legislative leadership approved a workaround that would let residents pay their property taxes as “charitable contributions” – which at the time had no caps on the number of tax deductions that could be made on federal tax returns – to the town where they live. But the Internal Revenue Service has since closed the loophole.
Under Senate Bill 3246, which takes effect immediately, certain business owners could take the state income tax that they owe and pay it as business expenses.
This “pass-through entity” – where the corporate income tax is paid by the owners and not at the corporate level – is aimed at avoiding double taxation for business owners. Under the state legislation, whatever the business owner paid, they would receive that amount as a tax credit against what they owe to the state.
Federal law has very loose requirements for the number of business expenses that could be claimed on a federal tax return.
Owners of S-corporations, limited liability companies and partnerships would be eligible to take advantage of this new SALT workaround.
“This legislation will help to defray the out-of-pocket income tax hit for ‘mom and pop’ small business owners who were hurt by the cut in the SALT deduction at no cost to the state budget,” one of the bill’s main sponsors, Sen. Troy Singleton, D-7th District, said in a Dec. 17 statement.
The changes could provide up to $450 million a year in federal tax cuts for small business owners, professionals and their families, according to a 30-page report released in August by the 25-member Economic and Fiscal Policy Working Group panel convened by Senate President Stephen Sweeney, D-3rd District.
The state already has 111,500 S-corporations and 175,000 “law firms, medical groups, accounting practices and other partnerships that were created as limited liability corporations” that could be affected by the changes, according to the Senate Democrats Office.
“This bill will preserve the ability of thousands of New Jersey small businesses … to fully deduct their state income taxes following changes in the federal Tax Cuts and Jobs Act,” New Jersey Business & Industry Association Chief of Government Affairs Chrissy Buteas said in a statement earlier last month. “Protecting that tax deductibility for these job creators will ultimately strengthen our economy and give New Jersey a much-needed competitive boost in the region.”