Modifies eligibility for alternative business calculation adjustment allowed under gross income tax.

2026-2027 Regular Session Introduced by Nick Scutari

The bill narrows eligibility for the alternative business deduction by income, phasing out the 50% deduction for higher earners starting 2026, and raises about $120 million/year.

Substituted by A5323

Summary of Bill S 4537 (Session 222) – New Jersey

Purpose and intent

Modifies eligibility for the alternative business calculation adjustment under the New Jersey gross income tax.

Establishes new income-based limits on who can use the adjustment and reduces the deduction amount for higher-income taxpayers.

Aligns with Governor’s budget recommendations and aims to raise state revenue.

Key provisions and changes

Background of the adjustment (unchanged core concept):
The alternative business calculation allows a taxpayer to net losses in certain categories of gross income against gains in other categories, generating an “alternative business income” that can be subtracted from regular business income to form a “business increment.” A deduction, historically 50% of the business increment, is then subtracted from taxable income.

Taxable categories that may be offset (unchanged framework):
Losses and gains from the following can be netted for purposes of the alternative calculation:
1) Net profits from businesses
2) Net gains or net income from rents, royalties, patents, and copyrights
3) Distributive share of partnership income
4) Net pro rata share of S corporation income

Loss carryforward (unchanged mechanism):
If a taxpayer has an alternative business loss, it may be carried forward for up to 20 taxable years, under the director’s terms and conditions.

New income-based eligibility and phase-out (major change):
Beginning with tax year 2026:

Taxpayers with gross income > $500,000 but ≤ $1,000,000 will be able to deduct 25% of the business increment.
Taxpayers with gross income > $1,000,000 will be ineligible for the deduction.
Taxpayers with gross income ≤ $500,000 may continue to deduct 50% of the business increment (i.e., the current level remains for this group).

Immediate effect and retroactivity:
The act takes effect immediately and applies retroactively to taxable years beginning on or after January 1, 2026.

Affected parties

Taxpayers eligible for the alternative business calculation:
Those who currently benefit from the 50% deduction and fall within the new income thresholds.

Tax filers and revenue impact:
The changes are projected to increase state revenue by approximately $120 million per year, starting in the first year the provision applies (retroactive to 2026). Estimated impact is about 10,000 taxpayers, representing less than 1% of gross income tax filers.

Procedural and timeline notes

Effective date and retroactivity:

Immediate enactment with retroactive application to taxable years beginning on or after January 1, 2026.

Administrative references:

Changes implement as part of the state budget adjustments per the Governor’s FY 2027 recommendations.

Status and sponsors:

Introduced in the Senate on June 26, 2026; referred to the Senate Budget and Appropriations Committee. Co-sponsor: Nick Scutari.

Bottom-line impact

The bill narrows eligibility for the alternative business calculation by imposing higher income thresholds and phases out the 50% deduction for higher-income filers beginning in 2026.

It preserves a 50% deduction for taxpayers with gross income at or below $500,000.

It is projected to raise approximately $120 million in annual additional revenue and affect roughly 10,000 taxpayers.