Trenton – Bipartisan legislation sponsored by Senators Paul Sarlo (D-Bergen), Troy Singleton (D-Burlington) and Steve Oroho (R-Sussex) to preserve the federal deductibility of an estimated $35 billion in state income taxes for New Jersey’s small businesses and partnerships was signed into law by Governor Phil Murphy today.
The law, S-3246, will amend New Jersey’s state tax code to allow businesses to choose to revert to the system that was in place prior to 1993 under which S Corporations, Limited Liability Corporations (LLC’s) and other business partnerships directly paid the state income tax liability of their owners and partners.
“We decided to go ‘Back to the Future’ with a cost-saving solution,” said Senator Sarlo, chairman of the Senate Budget and Appropriations Committee. “This law doesn’t solve the whole problem created by a federal tax law that targets New Jersey by sharply curtailing the federal deduction for State and Local Taxes. But we are going to do everything we can to help New Jersey taxpayers.”
The law will potentially save billions of dollars for the 80 percent of New Jersey’s small businesses that are registered as S Corporations and pay their corporate taxes through the state income tax, as well as all of the law firms, medical groups, accounting practices and other partnerships that were created as Limited Liability Corporations.
“Now more than ever, ‘mom and pop’ business owners need laws that provide tax fairness and don’t negatively impact their bottom line,” said Senator Singleton. “This law will help to defray the out-of-pocket income tax hit for small business owners here in New Jersey and help alleviate the inequities created by the federal tax law.”
The senators said they worked on the plan with assistance from the New Jersey Society of Certified Public Accountants and its executive director, Ralph Thomas.
Based on the most recent IRS statistics, more than 300,000 individuals and families in New Jersey reported $35 billion in S Corporation and partnership income in 2015 that would no longer be tax-deductible under the federal tax law if paid on individual income taxes, but would be deductible if New Jersey returned to the previous entity-level system of taxation.