Recent New Jersey Pass-Through Income Tax is Available for the First Time for Tax Year 2020 

The recent law allows pass-through entities to elect to pay tax due on the owner’s share of distributive proceeds. The owner(s) may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.

Pass-through entities included under this law are: 

• Partnerships; 
• federal S corporations that have made the New Jersey S corporation election; and 
• Limited liability companies (LLCs). 

Single member limited liability companies and sole proprietorships are not eligible to pay the pass-through tax. For an entity to be eligible, they must have at least one member who is liable for tax on their share of distributive proceeds. 

Corporate partners are permitted to take the tax credit against the New Jersey surtax, as well as their corporate business tax liability.  However, the credit cannot reduce the corporate partner’s liability below the minimum tax.  Any excess credits can be carried forward for 20 tax years.  If a corporate partner is tax exempt, their pro rata share of the PTE tax shall be refunded. 

The tax paid by the entity is based on the sum of each partners’ “distributive proceeds” as follows (in this article, the term “partner” includes a shareholder in an S corporation): 

• First $250,000 – 5.675% 
• $250,001 – $1 million – $14,187.50 + 6.52% of the excess over $250,000 
• $1,000,001 – $5 million – $63,087.50 + 9.12% of the excess over $1 million 
• Over $5 million – $427,887.50 + 10.9% of the excess over $5 million. 

The partners can claim a refundable credit for their pro rata share of the tax paid on their personal return.