New Jersey's New Budget Strips a Key Tax Break From Its Highest-Earning Business Owners

Governor Mikie Sherrill signed New Jersey's $60.7 billion fiscal year 2027 budget on June 30, 2026, and buried inside it is a change that raises the effective state tax bill for the state's highest-earning pass-through business owners. The budget eliminates, for income above $1 million, the personal income tax adjustment that has offset New Jersey's Business Alternative Income Tax, retroactive to January 1, 2026.

What changed

New Jersey's BAIT lets partnerships, S corporations and other pass-through entities pay income tax at the entity level, which lets many owners work around the $10,000 federal cap on state and local tax deductions, since the entity-level tax is fully deductible on the business's federal return. To avoid double-taxing that income on the owner's personal New Jersey return, the state has allowed owners to claim an offsetting Alternative Business Calculation, or ABC, adjustment. The new budget narrows that offset sharply: owners with income between $500,000 and $1 million may now claim only 25% of the adjustment, and owners with income above $1 million can no longer claim it at all, according to a summary from BKC CPAs. Both changes apply retroactively to tax years beginning January 1, 2026. Separately, the budget imposes a temporary $1 million cap on corporate net operating loss deductions for four years, which the state expects to raise more than $485 million.

Who is affected

The change targets New Jersey pass-through business owners - law firm and medical practice partners, real estate operators, and closely held company owners - whose personal income, including their share of business profit, exceeds $500,000, with the full hit landing above $1 million. These are generally the same households that adopted BAIT elections specifically to preserve a federal SALT workaround; New Jersey is now taking back part of the state-level benefit even as the federal deduction remains available to the business.

The after-tax math

Example: a New Jersey S corporation owner has $1.5 million in personal income for 2026, including a large pass-through share of BAIT already paid at the entity level. Under the old rules, the ABC adjustment would have offset most of that income from New Jersey's personal income tax base. Under the new budget, because the owner's income exceeds $1 million, none of that adjustment is available. At New Jersey's top marginal personal rate of 10.75%, losing an adjustment of, say, $400,000 in offsetting income costs the owner roughly $43,000 in additional state tax for 2026 alone - on top of the entity-level BAIT the business already paid.

Moves to discuss with your advisor

• Recompute 2026 New Jersey liability now. Because the change is retroactive to January 1, owners who budgeted around the old ABC adjustment may be underpaid for the year already.
• Revisit BAIT elections for 2027. The math on whether an entity-level election still beats paying tax directly at the personal level has shifted for owners over $500,000, and should be rerun rather than assumed to still work the same way.
• Coordinate with the federal SALT cap. The entity-level BAIT payment itself remains fully deductible on the business's federal return regardless of this change, so the loss is confined to the New Jersey personal return.

What to watch

New Jersey joins a small group of states narrowing pass-through workarounds even as the federal SALT cap debate continues in Washington. Business owners near the $500,000 and $1 million thresholds should watch for further technical guidance from the New Jersey Division of Taxation on how the retroactive change applies to estimated payments already made earlier in 2026.

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