New Jersey Governor Phil Murphy signed legislation Monday giving small businesses in the Garden State a workaround for the cap on state and local tax deductions (SALT) under the Tax Cuts and Jobs Act (TCJA) — the 2017 federal tax overhaul that capped SALT deductions at $10,000 – a move of particular import in states like Maryland.
This bill permits pass-through businesses, including S corporations, limited liability corporations, and other business partnerships, to shift the obligation to pay New Jersey tax on the business’ New Jersey income from the members of the business to the business. Doing so will preserve the full deductibility under federal tax laws of New Jersey income taxes paid on the pass-through business’ New Jersey income.
While the TCJA limits to $10,000 the annual deductibility of SALT deductions under the federal personal income tax for individual taxpayers, it does not cap SALT deductions for businesses. In general, members of a pass-through entity report the entity’s taxable income on their income tax returns.
According to The Hill:
The authors of the legislation said the law could help small business owners save money, since most small businesses in New Jersey pay taxes through the personal tax code. Other businesses organized as pass-throughs include law firms, accounting firms and medical practices.
“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,” state Sen. Troy Singleton (D), one of the authors of the legislation, said in a statement.
Maryland, Connecticut, New Jersey, and New York last year filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit to continue litigation against the federal government for its cap on SALT deductions.
According to a report from The Government Finance Officers Association (GFOA), 45 percent of taxpayers in Maryland benefitted from the deduction in 2014, more than any other state.
Stay tuned to Conduit Street for more information.