Alan Sobel, CPA, managing member of Sobel & Co. LLC, recently proposed a plan to help small businesses or flow-through entities in New Jersey in light of the recent limitations on the state and local tax (SALT) deduction stemming from the Tax Cuts and Jobs (TCJA) of 2017.
The plan has been endorsed by Senators Paul Sarlo (D-Bergen), Steve Oroho (R-Sussex), Troy Singleton (D-Burlington) and Anthony Bucco Sr. (R-Morris), who are drafting legislation in conjunction with NJCPA’s State Tax Task Force.
“I became concerned that businesses were going to lose another competitive advantage by being in New Jersey,” Sobel said. “The provisions of the new federal law provided that if the tax is paid by an entity, it is deductible, but when it’s paid by an individual, it is not.”
Other states, like Texas, have a franchise tax, not an income tax, for flow-through entities, which makes Sobel question whether that could be done similarly for New Jersey. “Why doesn’t New Jersey just tax the entity at the corporate level, and therefore, under the federal law, in my opinion, it would be deductible?”
For state purposes, he explained, “it would not cost New Jersey taxpayers an extra dollar. The state would also not make an extra dollar as it is revenue-neutral. The only thing that would happen is that businesses that are taxed as flow-through entities for federal purposes would benefit from the ability to deduct the state taxes, and it would be a ‘win-win’ situation.”
“My concern is that the state government could use it as a tool to raise taxes in other ways in New Jersey,” when, Sobel explained, “it’s just intended to be one item that would lead towards creating a better business environment.”
“This proposal is another step forward in helping small businesses and in keeping the state a competitive place to do business,” added Ralph Albert Thomas, CEO and executive director of New Jersey Society of Certified Public Accountants (NJCPA).
In a letter relating the plan to Governor Murphy, Sobel asked for this change to be retroactive to January 1, 2018. “If enacted this change could save business owners up to 9 percent off their federal taxes, at no cost to the state,” said Sobel. And, he added, it would give a signal that New Jersey is attempting to be “business friendly.”
The federal government, however, may “take it a little on the chin and would bear an economic loss as a result of it,” said Sobel.
What’s key to making Sobel’s plan work, he explained, is that it is free from “double taxation,” when someone not only gets taxed on earnings but when they take the money out of the entity as well. “If you were to elect to be a C corporation, you would be electing into double taxation,” said Sobel. In the past, New Jersey did not recognize these kind of flow-through entities so it resulted in double taxation, whereas Sobel’s plan would not have double taxation.
While many corporations have investigated converting from a flow-through entity to a C corporation (mostly used by large and publicly held companies) to take advantage of “substantially lower tax rates,” in almost every situation Sobel calculated for his clients he says it still makes sense to be a flow-through entity, such as an S corporation, partnership, LLC or sole proprietorship. “The outcome of converting to a C Corporation would not be beneficial,” he added.
There could still be technical corrections to the TCJA to make the change itself or for other revisions. But additional changes, especially if they hurt small business, could result in much more resistance, he said.
To access more business news, visit njbmagazine.com