Some of our business clients may have already experienced the effects of New Jersey’s Business Tax Reform Act of 2002, which went into effect last year. The new law has a substantial economic impact on all partnerships, limited liability companies (LLC’s), limited liability partnerships (LLP’s), and professional corporations, that derive income from New Jersey sources. The biggest impact is on the LLC’s and LLP’s – the newest forms of business entity that, until now, had no tax. The new law essentially places a “tax” of $150.00 per partner or member (in the form of a filing fee for each partner or member’s K-1 Form). The filing fee is capped at $250,000.00 for entities with more than 1,666 partners/members. The fee applies to all partnerships, LLC’s, etc., that derive income from New Jersey (but will not apply to partnerships required to file solely because the partnership has New Jersey residents as partners/members). Additionally, each entity must deposit 50% of their current year filing fee to be paid with the current year tax return, and applied to the filing fee for the following year. Entities that have non-resident members must pay mandatory withholding for each non-resident member’s allocable share of New Jersey income (multiplied by 6.37% for non-corporate members and 9.0% for corporate members). Professional corporations, on the other hand, not only have to pay the $150.00 filing fee per member, and the 50% filing fee for the deposit to be applied to the succeeding tax year, but also must pay a $500.00 annual minimum corporate business tax.
The Business Tax Reform Act was intended to close the various loopholes that allow many profitable companies to reduce their taxable New Jersey income, and help rectify the State’s substantial budget deficit. However, by effectively taxing business entities that are normally “tax-free,” New Jersey may have created a disincentive for doing business in New Jersey.
James M. Maggio, Jr. , is a Partner at WJ&L, who practices in the Transactional Business and Corporate areas.