The New and Improved New Jersey BAIT
February 15, 2022
By William Gentilesco and Jeanne-Marie Waldman
Since New Jersey’s enactment of the Pass-Through Business Alternative Income Tax (“BAIT”), professional service firms and other pass-through entities have begun to reap the federal income tax benefits of this entity-level tax. BAIT filers should be aware that the NJ Division of Taxation made certain key changes that affect 2021 BAIT reporting.
Beginning in 2021
Distributive Proceeds – Originally, the NJ Division of Taxation had calculated the BAIT tax base or “distributive proceeds,” using federal rather than New Jersey taxable income. New Jersey requires certain adjustments to an entity’s federal taxable income to arrive at the New Jersey tax base, which is then shared among the owners. Under the 2020 method, the BAIT paid for the firm’s owners could have been considerably underpaid or overpaid because the calculation disregarded the state adjustments. Starting with the 2021 reporting year, the BAIT computation begins with New Jersey taxable income and results in better alignment with the owners’ New Jersey tax liability.1
New Jersey Apportionment – For tax year 2021, S corporations calculating their BAIT tax base may use either the default apportionment method for S corporations, which is a single-sales factor, or an evenly weighted three-factor formula.2 If a firm chooses the three-factor apportionment formula, it must complete and attach the NJ-NR-A Business Allocation Schedule to its return and use the three-factor formula in calculating each shareholder’s distributive proceeds for purposes of the BAIT calculation.
This choice between apportionment methods has not been extended to New Jersey partnerships, which must continue to use the evenly weighted three-factor formula.
Credit Carry Forward – A firm that overpays its tax in one year will be permitted to apply the excess to the subsequent taxable year. In 2020, firms were prohibited from applying a 2020 overpayment to 2021 liability, so many taxpayers awaited large 2020 BAIT refunds while disbursing cash for 2021’s quarterly estimates. Note: firms must file their 2022 BAIT election before applying 2021 overpayments to 2022.
Consolidated Return – The 2021 PTE-100 contains an election to file on a consolidated basis.
Estimated Payments/Installment Interest – Schedule PTE-160, Underpayment of Estimated Pass-Through Business Alternative Income Tax, must be included if the firm calculates interest on an underpayment of estimated tax or an exception applies to the imposition of that interest.
A firm with zero liability in the prior year may rely on the safe harbor provisions to forego making estimated payments for the current tax year.
Beginning in 2022
In January 2022, NJ Governor Murphy signed a bipartisan bill (S4068) that modifies the BAIT structure and “cleans up” aspects of the original tax that did not work well in practice. Such changes are effective for BAIT years that begin on or after January 1, 2022.
Tax Base for New Jersey Residents – The BAIT will be calculated on all income earned by New Jersey resident partners/LLC members that are individuals, estates or trusts. By requiring New Jersey resident owners to include all their income in the calculation (rather than only the NJ-sourced amount), they should obtain a much greater federal income tax benefit from the BAIT.
The BAIT for New Jersey S Corporations continues to be limited to New Jersey-sourced income.
Bracket Changes – As a result of the amendments, the BAIT increases to the top rate of 10.9% on firm income over $1M. Until 2022, there is a middle bracket of 9.12% for income between $1M and $5M.
Nonresident Withholding – The new 2022 BAIT does not require a partnership or LLC taxed as a partnership to withhold New Jersey gross income tax on behalf of a nonresident partner/LLC member who reasonably expects to be refunded such withholding due to their anticipated BAIT credit.
Additional guidance should be available once the 2021 BAIT forms and instructions are released. As the tax season unfolds, remember to incorporate the 2021 changes in calculating your firm’s BAIT and keep the 2022 modifications in mind during tax planning.
1This change does not affect tax year 2020. Taxpayers are still required to follow the 2020 return and instructions, whether they are filing an original or amended 2020 PTE-100.
2Note that this apportionment option is only for New Jersey S corporations that elect and file a BAIT return. It does not apply to the NJ CBT-100S, which still requires the single-sales factor.