How the election works
Since 2018 the federal deduction for state and local taxes has been capped. Starting with 2025 returns the cap is $40,000 ($40,400 for 2026), but it shrinks by 30% of your income over $500,000 ($505,000 for 2026) and is back to $10,000 by about $600,000. For most Bergen County business owners at that income, property taxes alone use up the $10,000.
New Jersey’s Pass-Through Business Alternative Income Tax, or BAIT, is the way around the cap. The S Corporation elects to pay the tax itself. Under IRS Notice 2020-75, a tax paid by the business is a business deduction, not a personal SALT deduction, so the cap does not apply to it. You then claim your share as a refundable credit on your New Jersey return. The federal tax law signed in July 2025 left this in place.
A worked example
Isabella owns all of a New Jersey consulting firm taxed as an S Corporation. She pays herself a $200,000 salary, and the S Corporation earns another $500,000 of profit, all of it in New Jersey. She is married, files jointly and pays $16,000 a year in property taxes on her home.
| 5.675% on the first $250,000 | $14,187.50 |
| 6.52% on the next $250,000 | $16,300.00 |
| BAIT paid by the S Corporation | $30,487.50 |
| Refundable credit on Isabella’s NJ-1040 | ($30,487.50) |
| Federal deduction for the S Corporation | $30,487.50 |
| Federal tax saved at 35% | $10,670.63 |
Without the election, Isabella’s income is past the phase-down range, so her SALT cap is $10,000, and her property taxes use all of it. The $30,487.50 of New Jersey income tax on the same profit gets no federal deduction at all. With the election, the full amount comes off the S Corporation’s income before it reaches her federal return. New Jersey comes out even: she pays the same state tax either way, just through the S Corporation. The result is about $10,670 less federal tax for the year.
The example assumes no 20% qualified business income deduction, which is typical for a consulting firm at this income. When a business does take that deduction, the BAIT payment reduces it, and the federal savings run about 20% lower.
When it may not pay
- Owners under the phase-down. With income under $500,000, you can deduct up to $40,000 of state income and property taxes on your own return. If yours fit under that and you itemize, the election adds less, and it can trim your qualified business income deduction. We run it both ways.
- No New Jersey S election. Only New Jersey S Corporations can elect. If your company is an S Corporation federally but never filed New Jersey’s CBT-2553, New Jersey taxes it as a C Corporation and it cannot make the election.
- Owners in other states. A nonresident owner claims the New Jersey credit on an NJ-1040NR, but their home state has to give credit for the tax as well. Check that before electing.
- Several owners. The S Corporation pays the tax on every owner’s share, and owners with different incomes or home states may not benefit equally. Agree on it before you elect.
- A loss or a thin year. No profit, no tax, and nothing to deduct.
Timing that matters
- The election is made online each year by the original due date of the return, March 15 for a calendar-year S Corporation. For 2026, that is March 15, 2027. It cannot be made late, and an extension does not extend it.
- Estimated payments are due April 15, June 15, September 15 and January 15. The S Corporation deducts BAIT in the year it pays it, so paying the fourth installment by December 31 moves that deduction into the current year. A balance paid with the March return is deducted the next year.
- Every year is a new decision. You can elect one year and skip the next.
This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.