On Dec. 22, 2022, New Jersey Gov. Phil Murphy signed A4295, which makes changes to the rules for S corporation and partnership audits.
Prior to the enactment of A4295, an entity that elected to be an S corporation for federal income tax purposes was not automatically treated as an S corporation for New Jersey tax purposes. Instead, federal S corporations were required to make a separate New Jersey S-corp election to be taxed as a pass-through entity for state tax purposes. A federal S corporation that failed to make a New Jersey S-corp election was taxed as a C corporation under the state’s corporation business tax. As a result, a federal S corporation that did not make a New Jersey S-corp election but that filed a CBT-100S, “New Jersey Corporation Business Tax Return,” owed corporate business tax, interest, and penalties on the unpaid tax, and potentially created built-in gains if the New Jersey S-corp election were to be made for future years.
For tax periods beginning after Dec. 22, 2022, A4295 amends the definition of “New Jersey S corporation” to mean “a corporation that has elected to be an S corporation for federal tax purposes.” Following enactment of this legislation, a federal S corporation automatically will be treated as an S corporation for New Jersey tax purposes, thus, eliminating the need to make a separate state election.
This legislation also provides that any S corporation may elect not to be taxed as a New Jersey S corporation. An election to opt out of being treated as an S corporation for New Jersey state tax purposes may be made for any taxable year at any time during the preceding taxable year or at any time on or before the due date or extended due date of the S corporation’s tax return. The election to opt out of being treated as a New Jersey S corporation is effective for the taxable year for which it is made and for each succeeding taxable year until revoked.
This change will impact federal S corporations subject to tax in New Jersey for tax years beginning on or after Dec. 22, 2022.
Crowe observation
Taxpayers affected by A4295 should contact their tax advisers to discuss how the new law will affect them and evaluate whether to opt out of being a New Jersey S corporation.
The New Jersey Division of Taxation issued a technical bulletin that provides administrative guidance on this law change.
New Jersey has joined other states that have aligned with the federal partnership audit rules. Under A4295, partnerships are required to report IRS adjustments related to tax periods ending on or after Jan. 1, 2020, within 90 days of the final determination date. A partner then is required to make additional payments of state tax resulting from the federal adjustments, and the partnership can make an election to pay tax on its partners’ behalf. The New Jersey Division of Taxation may assess tax against the partnership, its partners, or both within two years of the date a federal adjustments report is filed with the state. In the event the partnership fails to report the federal adjustments to the state, the Division of Taxation can assess tax against the partnership, its partners, or both using the best information available.
