Owners of New Jersey pass-through entities have a new way to get around the $10,000 cap on state and local tax (SALT) deductions imposed by the Tax Cuts and Jobs Act of 2017.
Governor Murphy signed a bill on January 13, 2020, that would allow residents who own S-corporations, limited liability companies and partnerships to pay their state income tax as a business expense. It is important to note that, while a deduction for these expenses will be allowable on the NJ K-1, the IRS has yet to approve or disapprove of the deduction. While the IRS may not comply with the state of New Jersey’s request for a federal deduction, it has no control over the state’s decision.
Effectively immediately, this measure is designed to allow business owners to fully deduct their state income taxes without any effect on the state budget. Taxpayers should keep in mind that taking advantage of this workaround may have implications on their ability to claim credits on taxes paid to New York, Connecticut and other states.