New Jersey legislative updates:  S Corporation election requirements, partnership audit regime & Covid-related statute extensions

New Jersey changes to S corporation election requirements

Prior Law

Under prior law, shareholders of S corporations were required to make a separate, affirmative election in order for a federal S corporation to be recognized as an S corporation for New Jersey income tax purposes. S corporations that did not make the separate New Jersey election were treated and taxed as C corporations for New Jersey purposes and were required to file the New Jersey Corporation Business Tax Return (Form CBT-100).

Taxpayers were often surprised by this requirement which resulted in continuing requests to the New Jersey Division of Taxation (“Division”) for retroactive relief for taxpayers that did not timely elect S corporation status in New Jersey.

New Law

As a result of the new legislation, for tax privilege periods beginning after December 22, 2022, a separate New Jersey S corporation election is no longer required. A federal S corporation that has properly and timely filed a federal S corporation election will be automatically treated as a New Jersey S corporation, unless the corporation takes affirmative steps to opt out.

The new legislation provides the following means of “opting out” of S corporation status in New Jersey:

• 100% of the shareholders must agree to the opt out.
• The election to opt out can 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 will remain effective until it is revoked by the shareholders. The approval of shareholders holding more than 50% of the shares of the corporation is required to revoke the election to opt out.
• It is not yet clear how taxpayers should go about making the election to opt out of S corporation status for New Jersey purposes. The Division is expected to issue guidance regarding this issue as well as responses to multiple questions including how these changes impact the treatment of Qualified Subchapter S Subsidiaries (“QSSS”) and Electing Small Business Trusts (“ESBT”).

New Jersey adoption of changes to partnership audits

In order to conform to the new federal partnership audit regime, New Jersey has adopted the following provisions:

• Partnerships will be required to report any federal partnership audit adjustments made by the IRS to the Division on a federal adjustments report within 90 days after the Final Determination Date.
• The partners of the reviewed tax year must pay any additional tax that results from the federal partnership audit adjustments reported on the Federal Adjustments Report, unless the partnership makes the election to pay tax on the partners’ behalf.
• A federally audited partnership will have the option to elect to pay New Jersey taxes due as a result of the federal audit.
• The sole authority to act on behalf of the partnership and its partners (with respect to required or permitted actions under the new federal partnership audit regime) will rest with a “state partnership representative.” Unless the partnership designates in writing another person as its state partnership representative, the state partnership representative will be the partnership’s “federal partnership representative.”
• The Division will be permitted to assess the federally audited partnership, partners, or both, for any New Jersey taxes owed.

The new law is effective as of December 22, 2022 and is applicable retroactively to adjustments to a taxpayer’s federal taxable income on, or after, January 1, 2020.

The Division is expected to provide additional guidance regarding partnership audit amendments.

The COVID extension of the statute of limitations on assessments has ended

Prior Law

Almost three years ago, at the beginning of the COVID-19 pandemic, Governor Murphy issued Executive Order 103 declaring a state of emergency in New Jersey. Following that order, the New Jersey Legislature enacted a law that extended the deadline for the Division to assess New Jersey tax until 90 days after the conclusion of the state of emergency.

This legislation caused much consternation for taxpayers as they remained subject to additional tax long after the statute of limitations would normally have ended the Division’s right to issue an assessment. This situation had become a substantial concern for taxpayers and practitioners because of the possibility that the state of emergency could have continued to remain in effect for multiple years.

New Law

At the end of 2022, legislation was enacted to end the COVID extension of the statute of limitations on assessments effective December 22, 2022. This was done with the support of the Division. The legislation provides that “any assessment of tax that was allowed as a result of the extension of the statute of limitations…but that was assessed after the date of the enactment…shall be voided.” As a result of the new law, any assessment of tax that was permitted pursuant to the extension will be voided if made after December 22, 2022.

Mazars’ Insight

The action taken by New Jersey is a welcome development that will eliminate inadvertent failures of corporations to elect New Jersey S corporation status. In addition, it will eliminate controversies surrounding retroactive S elections that were often not approved under the old rules.

As discussed above, the Division is expected to issue guidance as well as answers to FAQs regarding the changes related to the S corporation election as well as the partnership audit regime. Taxpayers impacted by these changes should be on the lookout for this guidance in the near future.

Please contact your Mazars professional for additional guidance.

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.