New Jersey Division of Taxation Issues Guidance on S Corporation Procedures
On December 22, 2022, New Jersey enacted P.L. 2022, c. 133, which changed the Corporation Business Tax and Gross Income Tax procedures for S corporations. Most significantly, for privilege periods beginning on or after December 22, 2022, the new law provides that a taxpayer that qualifies as an S corporation or a Qualified Subchapter S Subsidiary (“QSSS”) for federal tax purposes no longer needs to make a separate S corporation or QSSS election for New Jersey tax purposes. In order to be treated as a New Jersey S Corporation or QSSS, a business must be: (i) registered as a corporation with the Division of Revenue and Enterprise Services (“DORES”); (ii) provide proof of its federal S corporation status; and (iii) obtain shareholder consent for the New Jersey tax treatment of that entity. On March 31, 2023, the New Jersey Division of Taxation (“Division”) issued a Technical Bulletin (TB-105) providing Corporation Business Tax and Gross Income Tax Guidance regarding S Corporations and QSSSs. On April 5, 2023, the Division posted supplemental guidance related to TB-105 on its website.
Shareholder Consents. The Division’s guidance explains that newly formed S corporations are required to submit a Shareholder Jurisdictional Consent to DORES. If a nonresident shareholder does not consent to New Jersey jurisdiction, then the S corporation must consent to the assumption of any tax liabilities on their behalf when filing Form CBT‑100S.
Hybrid Corporations. An entity that is treated as an S corporation for federal tax purposes can opt out of being treated as a New Jersey S corporation by making a C Corporation Tax Status Election, which requires the C Corporation Tax Status Election Consent of 100 percent of the shareholders. In this case, a record of the votes taken by the shareholders electing or revoking C corporation status must be retained but need not be submitted to DORES unless requested.
Mergers and Reorganizations. For mergers or reorganizations on or after December 22, 2022, the guidance explains that New Jersey generally conforms to the federal rules and revenue procedures regarding mergers and reorganizations. While there is no longer a requirement that the entity make an affirmative New Jersey S corporation (or QSSS) status election if the entity has federal S corporation (or QSSS) status, businesses are required to update their status with DORES.
Other topics covered by the guidance include pass-through entity alternative income tax, eligibility for voluntary disclosure agreements, New Jersey treatment of federal tax-free “F” organizations, revocation of a C corporation election, and failure to make a federal or New Jersey electing small business trust election by an S corporation shareholder. The Division is continuing to work with DORES to create procedures for S corporations to comply with the new rules and will update its website as more information becomes available.
This update is one in a series of updates written for the May 2023 edition of The BR State + Local Tax Spotlight.