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State and Local Tax Work Around for Businesses

Before the Trump tax cuts, taxes paid to state and local governments could be deducted as an itemized deduction. The tax cuts capped this deduction at $10,000 per year, hitting many high income tax states, not only high earning tax payers.  Since the limit was put in place, many states have been making efforts to work around the cap. While the IRS blocked New Jersey’s attempt to make property taxes a charitable donation, it has provided some relief to businesses.

New Jersey created the Business Alternative Income Tax, an elective entity-level tax on pass-through businesses.  The law allows NJ pass-throughs to pay tax at the entity level and allows the owners of the business to obtain tax credits against their personal income tax.  The IRS has now released guidance that will allow these pass-through businesses to deduct the taxes imposed on the entity. They further clarified that they will accept the deduction even when the tax is elected into and not only when it’s mandated. This clears the way for NJ businesses to deduct state taxes at the entity level, thereby reducing the federal income passed through to the entity owners.  

The notice states:

Deductibility of Specified Income Tax Payments. If a partnership or an S corporation makes a Specified Income Tax Payment during a taxable year, the partnership or S corporation is allowed a deduction for the Specified Income Tax Payment in computing its taxable income for the taxable year in which the payment is made.  The term “Specified Income Tax Payment” means any amount paid by a partnership or an S corporation to a State, a political subdivision of a State, or the District of Columbia (Domestic Jurisdiction) to satisfy its liability for income taxes imposed by the Domestic Jurisdiction on the partnership or the S corporation.

New Jersey’s payment site can be found here.