Searching for opportunities to reduce our clients’ New Jersey Gross Income Tax costs in the midst of the closing days of our 2014 tax busy season, we revisited one of New Jersey’s relatively recent legislative changes – the Alternative Business Calculation Adjustment.
The inability to offset income and losses occurring in different business categories in determining one’s New Jersey Gross Income Tax has always been an issue for individuals, trusts and estates. In 2011, the state passed legislation that lessened its impact. As a result, taxpayers may rely on the ABCA to partially offset gains from one category of gross income with losses from another category of gross income.
The ABCA and Why It May Be Worth Your Consideration
For tax years beginning on or after January 1, 2012, New Jersey Gross Income Tax taxpayers who have losses in certain business-related categories of income are permitted to take into consideration those losses to calculate an adjustment to their taxable income (“ABCA”). Taxpayers may also carry forward unused losses in those categories for a period of 20 years to calculate future adjustments. This change applies to residents, nonresidents, and estates and trusts.
The benefit of the ABCA is phased in commencing in 2012 as follows:
2016 & after 50%
Prior to the adoption of the ABCA, New Jersey GIT tax provisions only permitted the offset of gains and loss if they were incurred in the same business category. If a New Jersey taxpayer incurred net losses in one or more of the four income categories, those losses were not permitted to offset gross income from one or more of the other gross income categories.
The ABCA permits GIT taxpayers who have losses in one or more of the following categories to include those losses in the calculation of their ABCA to reduce their taxable income:
- Net profits from business
- Net gains or net income from rents, royalties, patents and copyrights
- Distributive share of partnership income
- Net pro rata share of S corporation income.
The ABCA may benefit both New Jersey resident and non-resident taxpayers.
Don’t Rely on Tax Compliance Software To Automatically Calc the ABCA
Our experience with tax compliance software indicates that it may not automatically prepare the ABCA. In addition, the software may not identify that the taxpayer may be eligible to use the ABCA in calculating its New Jersey GIT.
Remember to Complete NJ-BUS-2
Taxpayers with income or losses from one or more of the four income categories are required to complete Schedule NJ-BUS-1, NEW JERSEY GROSS INCOME TAX , BUSINESS INCOME SUMMARY SCHEDULE. In addition, taxpayers with income and losses from one or more of the four income categories are required to complete Schedule NJ-BUS-2, NEW JERSEY GROSS INCOME TAX, ALTERNATIVE BUSINESS CALCULATION ADJUSTMENT.
Revisit Your 2012 New Jersey 1040 and 1040 R
Since the ABCA was enacted effective for 2012 tax years, if you or your client incurred losses in one or more of the four business categories and a NJ-BUS-2 was not included in your 2012 New Jersey filing, you may wish to revisit this issue to determine if you have a potential opportunity for a refund as well as to determine if you have ABCA loss carry forward from 2012.
The ABCA One of New Jersey’s Somewhat Hidden Tax Treasures
As with so many states, New Jersey is a state full of “Hidden Treasures” ripe for our exploration. The ABCA may be one of New Jersey’s not so hidden tax treasures for you and/or your clients. For additional information check out New Jerseys official release on the Alternative Business Calculation Adjustment. Happy hunting!!