NJ Governor Signs New Laws that May Impact Your Business or Non-Profit

As of January 2022, several new laws have been passed in the state of New Jersey that could impact the tax planning for your business or non-profit.

Revised NJ Business Alternative Income Tax Act (BAIT)

In late 2020, New Jersey enacted the Pass-Through Business Alternative Income Tax Act (NJ BAIT) in an effort to work around the $10,000 federal cap on individuals’ itemized deductions for state and local income taxes (SALT). This allowed partnerships, S corporations, and LLCs with at least two members to pay state tax on the entity level so that the owners receive a tax benefit through a deduction against their distributive share of income for federal tax purposes. The owners claim a refundable credit on their personal New Jersey return for their share of the state tax paid.

The new law signed by Governor Murphy this week revises and clarifies the NJ BAIT Act in the following five ways:

1. The source income for the BAIT calculation will be based on New Jersey income, not federal.
2. Permits a three-factor formula for allocation of income to New Jersey for all pass-through entities and clarifies that tax payments made in tiered partnership structures can be applied to upper-tier non-individual entities.
3. Eliminates the need for non-resident withholding on partner income if the entity has a reasonable basis that the BAIT tax will cover the withholding amount required.
4. In event of BAIT overpayment, allows the choice of a refund or application to future estimated taxes.
5. Expands the highest tax bracket to include distributable income in excess of $1 million.

This legislative update increases the number of New Jersey resident business owners that can benefit from the NJ BAIT Act. If you wish to take advantage of this election, contact an Alloy Silverstein tax advisor to help determine if this is applicable to you.

Higher Threshold for Non-Profit Audit Requirement

NJ Bill S844/2533 amends the state’s Charitable Registration and Investigation Act to raise the threshold at which smaller non-profit organizations must file audited financial statements and also allows exclusions of certain non-monetary contributions from the organization’s gross revenue for the purpose of requiring annual disclosure reports.

• Effective immediately, the minimum annual gross revenue required for a not-for-profit to undergo an audit is raised from $500,000 to $1,000,000.
• The bill now excludes non-monetary in-kind donations directly related to the mission of the charitable organization from gross revenue. Examples include food donations for food pantries or supplies for a shelter.
• In addition, for the purpose of determining if an audit is required, gross revenue will no longer include: one-time bequests, fundraising campaigns for capital property in a single fiscal year, the value of services performed by volunteers, or items purchased by other entities for the use of the charitable organization in situations in which ownership of the item is retained by the original purchaser.
• Though an audit may no longer be required, the law does provide that charitable organizations with annual gross revenues in excess of $25,000 but less than $1,000,000, must file an annual financial report that is certified by the organization’s president or other authorized officer.

The intention is that the expenses that would normally be incurred for an audit could otherwise be used to further the charitable mission of these smaller but impactful organizations.

New NJ Misclassification Penalties Effective January 1, 2022

Originally signed into law in July along with a bundle of laws aiming to mitigate employee misclassification, NJ Bill A5892/S3922 instills higher penalties for misclassification if it’s determined through an investigation that the misclassification was a purposeful means of evading payment of insurance premiums. As of January 1, 2022, this law now makes it a violation of the New Jersey Insurance Fraud Prevention Act and is subject to fines starting at $5,000 for the first violation, $10,000 for the second, and up to $15,000 for each subsequent violation.

Should you have questions or need to discuss these matters further, your Alloy Silverstein Accountant and Advisor is just one phone or video call away.