TRENTON – Legislation authored by Senators Paul Sarlo (D-Bergen), Troy Singleton (D-Burlington), Steve Oroho (R-Sussex), and Anthony Bucco Sr. (R-Morris) that will preserve the federal deductibility of an estimated $23 billion in state income taxes for small businesses and partnerships was approved by the Senate today.
The bill is a product of the Economic and Fiscal Policy Workgroup, the blue-ribbon study group that made recommendations to improve New Jersey’s fiscal practices and economic strength. The legislation is part of the “Path To Progress” initiative.
The legislation, S-3246, will amend New Jersey’s state tax code 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. Entitled the “Pass-Through Business Alternative Income Tax Act,” the bill would establish an elective entity-level tax to be paid by pass-through businesses and would provide an offsetting credit to taxpayers who receive income from a pass-through business.
“We’re going ‘Back to the Future’ with an IRS-proof solution,” said Senator Sarlo, chairman of the Senate Budget and Appropriations Committee. “It will to a tax system that was in place for decades. This legislation 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.”
“Small business operators deserve tax laws that provide fairness and don’t negatively impact their bottom line,” said Senator Singleton. “This legislation 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.”
“This legislation will save hundreds of millions of dollars for the many New Jersey 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 LLCs,” said Senator Oroho, who is a Certified Financial Planner. “This plan works because the federal tax plan allows businesses to continue to deduct all of their taxes.”
Based on the most recent IRS statistics, more than 260,000 individuals and families in New Jersey reported $23 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.
The senators developed the plan with assistance from the New Jersey Society of Certified Public Accountants and its executive director, Ralph Thomas.
“Hundreds of thousands of New Jersey residents reported earnings from S-corporations and partnership income in recent years,” Senator Bucco said. “We have to do more to make our state more affordable for our neighbors and for the business owners that work hard every day to strengthen our economy. We can start by reducing out-of-pocket costs and preserving the tax-deductibility of their hard-earned income. This is a commonsense, bipartisan tax policy that will make a world of difference for our residents. I am grateful to advocates like Ralph Thomas and the Society of CPAs for their insight in the drafting of this legislation.”
The bill was approved with a vote of 40-0.