SALT Cap Workaround: Understanding New Jersey’s Business Alternative Income Tax (BAIT)

If you own an S-corporation, partnership, or LLC in New Jersey, you’ve likely felt the sting of the federal $10,000 cap on state and local tax deductions (SALT cap). Enter New Jersey’s Business Alternative Income Tax (BAIT) – a clever workaround that can save pass-through business owners thousands on their federal returns. The Business Alternative Income Tax (BAIT) in New Jersey allows S-Corps and partnerships to deduct state taxes at the entity level. Here’s what NJ small business owners need to know about this program:

• What is BAIT? Enacted in 2020, NJ BAIT allows pass-through entities (S-corps, partnerships, LLCs treated as such) to pay state income tax at the entity level instead of all through individual owners. In effect, the business pays a tax to NJ on its profits, and the owners get a refundable credit on their NJ personal returns for that amount. Why do this? Because state taxes paid by the business are fully deductible on the business’s federal return (not subject to the $10k SALT limit that applies on Schedule A of individuals). It’s a win-win: the IRS lets the business deduct 100% of those state taxes as a business expense, reducing federal taxable income, while the owners aren’t double-taxed – they claim a credit to offset NJ personal tax.

• How it works: Each year, the pass-through entity must affirmatively elect to pay BAIT by filing an online election form (due by the original due date of the entity return). The entity then pays tax on the “distributive proceeds” (basically the NJ-source income for S-corps, or all income for NJ-resident partners) at graduated rates (rates range from 5.675% up to 10.9% for income over $1 million). Come tax time, each owner receives a NJ K-1 showing credit for their share of BAIT paid. The owner will claim that credit on their NJ 1040 to get reimbursed or offset personal NJ tax. If the credit exceeds their NJ tax, NJ actually refunds the difference (so no money lost). Meanwhile, the business deducts the BAIT paid on its federal partnership or S-corp return, lowering the pass-through income that flows to owners’ federal returns. This effectively circumvents the SALT deduction cap by shifting the tax deduction to the entity level.

• How much can it save? Potentially a lot. The New Jersey Society of CPAs estimated BAIT could save NJ business owners a collective $200–$400 million annually in federal taxes. For an individual example, if your NJ S-corp has $300,000 of income, the BAIT tax (at say ~5.675% on that level of income) might be around $17k. The business deducts that $17k on the federal 1120-S, reducing owners’ K-1 income. If you’re in the 32% federal bracket, that’s about $5,400 federal tax saved. On your NJ return, you’d get a $17k credit to offset NJ tax (and any excess is refunded). Essentially, you converted non-deductible state tax into a deductible business tax. Bottom line: the only cost is a bit of complexity in filing, but the savings can be substantial for owners above the SALT cap.

• Important details: You must register your business with NJ and be up to date on filings to elect BAIT. The election is annual – if you forget to opt in for a year, you miss the benefit for that year. Also, estimated payments may be required during the year to avoid underpayment interest (Q4 estimate is due by Jan 15 of the following year for BAIT). For NJ resident owners, BAIT covers both NJ-sourced and out-of-state income of the pass-through (so residents get credit on all income). Nonresident owners are only taxed on NJ-source portion (and they get credit which usually fully offsets their NJ nonresident tax).

Example: John, a Livingston-based consultant, has an LLC taxed as a partnership that earned $150,000 in 2025. Normally, John would pay NJ tax on that via his personal return (~$8,000) and could only deduct $10k SALT total federally. Instead, John’s LLC elects BAIT, pays roughly $8k to NJ for BAIT. John gets a credit for $8k on his NJ return (wiping out his NJ tax). The $8k paid is deducted on the partnership federal return, saving John perhaps $1,800 in federal tax. Multiply that effect for higher incomes or multiple owners, and it’s easy to see why CPAs call BAIT a “no-brainer” for many NJ pass-through businesses.

New Jersey was among the first of 30+ states to enact this SALT workaround after the 2018 federal cap. It’s completely IRS-approved – the IRS confirmed these entity-level taxes are valid deductions. If you’re a NJ pass-through entity owner, talk to your CPA about electing BAIT. It’s one of the simplest ways to mitigate the SALT cap and keep more of your money in your business. Pro tip: You’ll still file your normal NJ CBT-100S or NJ-1065, along with a PTE-100 form for the BAIT. Keep an eye on NJ’s deadlines and ensure all owners consent as needed. The paperwork is worth the payoff.

Ready to Maximize Your Tax Savings with NJ’s BAIT Program?

Don’t let the SALT cap limit your deductions — make tax efficiency part of your business strategy today.

At Gregory Monaco, CPA LLC in Livingston, NJ, we help S-Corporation, partnership, and LLC owners take full advantage of New Jersey’s Business Alternative Income Tax (BAIT) program. Our team provides clear, personalized guidance to help you elect and manage BAIT properly — minimizing your federal tax liability while keeping your state filings compliant.

Whether you’re exploring the BAIT election for the first time or optimizing it for future years, we’ll help ensure your business captures every eligible deduction and credit. Stay proactive, save more, and turn complex tax laws into a competitive advantage.

Let’s make smart tax strategy a year-round habit.

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Gregory Monaco, CPA | Livingston NJ (serving NJ + virtual nationwide)