Legislature Passes Sarlo-Singleton Bill to Restore Deductibility of State Taxes for Small Business, LLCs

Modeled on Connecticut statute, bill is ‘IRS-proof’ because it restores entity-level payment system that was in place in NJ prior to 1993

TRENTON – Legislation sponsored by Senators Paul Sarlo and Troy Singleton that would effectively restore the federal deductibility of $35 billion in state income taxes for New Jersey’s small businesses and partnerships passed both the Senate and Assembly today.

The Sarlo-Singleton plan would give S corporations, Limited Liability Corporations (LLCs) and other business partnerships the option to directly pay the state income tax liability of their owners and partners, as they did prior to 1993 under New Jersey’s original income tax law. While the GOP’s 2017 federal tax law slashed the SALT (State and Local Tax) deduction for individual taxpayers to $10,000, there is no cap on SALT deductions for taxes paid by businesses.

“This provides a ‘Back to the Future’ solution to the federal cap on SALT deductions for potentially hundreds of thousands of small business owners and partners,” said Senator Sarlo (D-Bergen/Passaic). “It would be hard for the IRS to challenge our state’s prerogative to return to a tax system that was in place for 17 years. Connecticut enacted a similar ‘pass-through’ law last year, and Wisconsin and Arkansas may follow suit.”

“This legislation will help to defray the out-of-pocket income tax hit for ‘mom and pop’ small business owners who were hurt by the cut in the SALT deduction at no cost to the state budget,” said Senator Singleton (D-Burlington). “The tax law enacted by the Republican Congress was aimed to punish blue states like New Jersey, and we need to do everything we can to offset its negative effects.”

The bill could save billions of dollars for the estimated 115,000 New Jersey small businesses that are registered as S Corporations and pay their corporate taxes through the state income tax, as well as for the 175,000 law firms, medical groups, accounting practices and other partnerships that were created as Limited Liability Corporations.

The bill gives the owners and partners the option to elect to pay their state income taxes through their S Corporations or partnerships that can deduct those taxes from their federal taxes. Based on the most recent state Treasury statistics, partnership income accounted for $23.4 billion in state income tax revenue in 2015, while S Corporation income totaled $11.9 billion.

Senator Sarlo, who chairs the Senate Budget Committee, said the bill has the added benefit of creating budget flexibility by switching hundreds of millions of dollars in income tax revenue, whose use is restricted, to the General Fund.

The bill, which would take effect for the 2020 tax year, was originally proposed by Alan Sobel, a Livingston CPA, and has the support of the New Jersey Society of Certified Public Accountants.

The Assembly passed the bill 77-0 and the Senate concurred 34-0. The measure now goes to the Governor for his signature.