NJ can help small business sidestep big federal tax hit, senators say
A bipartisan group of senators is introducing legislation that aims to shield small businesses and partnerships from paying more in federal taxes by changing the way they pay their state income taxes.
On one level, it’s a variation on the concept of allowing municipalities to create charities to which residents can donate in exchange for a property tax credit – a plan not to lower taxes, but to make sure they remain as deductible in 2018 as they were before December’s federal tax reform.
That reform set a $10,000 cap on state and local tax deductions, often referred to as SALT. The charity workaround deals with the L – the local property tax. This new plan deals with the S – state income taxes.
Under the bill, New Jersey would return its tax code to the system that was in place prior to 1994, in which companies organized as S corporations, limited liability companies and other partnerships directly paid the state income tax liabilities of their owners and partners.
Right now those income taxes are paid by the individuals – meaning they’re subject to the $10,000 cap on state and local tax deductions. But the tax law didn’t put a cap on business tax deductions, said Sen. Paul Sarlo, D-Bergen.
“So essentially we’re going back to the future with a solution that is IRS proof,” Sarlo said. “I am not sure how the IRS could even think about challenging our decision to return to a tax system that was in place for decades.”
The idea came from Alan Sobel, a certified public accountant in Livingston. Jeff Kaszerman, the government relations director for the New Jersey Society of CPAs, said Connecticut is considering a similar change.
“We think that this idea could save New Jersey business owners hundreds of millions of dollars, and it’s not going to cost New Jersey anything. You really can’t beat that,” Kaszerman said.
Such a change could maintain the deductibility of nearly $1 of every $10 of income in New Jersey.
In announcing the plan, sponsors said more than 260,000 individuals and families in New Jersey reported an estimated $23 billion of income through S corporations and partnerships in 2015, the most recent year for which statistics are available.
The Statistics of Income report for 2015, published in January by the state Department of the Treasury, suggests it could be even higher. It said full-time New Jersey residents had reported around $23 billion in income through partnerships and around $12 billion through S corporations.
Combined, that was nearly 10 percent of the $358 billion in income reported in 2015, according to the Statistics of Income report.
Nearly 72 percent of the roughly $35 billion was earned by the wealthiest 1 percent of taxpayers, those with incomes of $988,000 or higher.
Sheila Reynertson, a senior policy analyst at New Jersey Policy Perspective, panned the idea.
“This proposal looks like another missed opportunity to raise much needed state revenue through higher taxes on upper-income households who fared the best under the federal tax law and whose federal tax cuts would get even bigger under this proposed ‘fix,’” Reynertson said.
“At the very least, the proposal should be modified to claw back some of the federal tax savings provided to high-income taxpayers with pass-through income,” said Reynertson, whose group supports higher taxes on income over $1 million.
Sen. Steve Oroho, R-Sussex, said 80 percent of small businesses in New Jersey are registered as S corporations and that law firms, accounting practices, medical groups and other partnerships were created as LLCs.
“This is something to essentially help our small businesses throughout our state,” said Sen. Troy Singleton, D-Burlington, “and it’s important because our small businesses are the primary job creators in the state of New Jersey, and we should never forget that.”
“We have seen over the years the demise and the moving of businesses out of our state because of taxes and regulations and whatnot,” said Sen. Anthony Bucco, R-Morris, “and we are trying to make sure that our businesses stay here so that we have jobs for our citizens.”