New Jersey Issues Guidance Explaining S Corp Election Changes

On February 2, the New Jersey Division of Taxation issued Technical Bulletin TB-105(R), which provides welcome guidance on the December 2022 changes to the corporation business tax procedures for federal S corporations and qualified subchapter S subsidiaries (collectively referred to herein as “S corporations”). Among those changes, for privilege periods beginning on or after December 22, 2022, the law eliminated the requirement that a federal S corporation make a separate New Jersey S corporation election for income tax purposes. A corporation must still be registered as a corporation with the Division of Revenue and Enterprise Services (DORES), provide proof that it received federal S corporation status, and consent to New Jersey tax treatment. 

Procedural Requirements

Federal S Corporation Status

For privilege periods beginning on or after December 22, 2022, a federal S corporation may file as a New Jersey S corporation even if it did not previously make the New Jersey election. If a corporation received its federal S corporation acceptance letter before registering with DORES, then it should upload a copy of the letter and file the shareholder jurisdictional consent when registering. If the corporation did not receive its federal acceptance letter before registering with DORES, it can provide the letter and complete the shareholder jurisdictional consent either when filing Form CBT-100S (the S corporation return) or by using the DORES S corporation election system.

To be treated as a New Jersey S corporation for privilege periods beginning before December 22, 2022, a corporation must make a retroactive election, which is filed via the DORES S corporation election system.

Shareholder Consent 

The new law requires New Jersey S corporations to submit the shareholder jurisdictional consent, which is the shareholders’ acknowledgement that New Jersey has the right to tax each shareholder’s S corporation income, regardless of the shareholder’s state of residency. Each shareholder that owns stock must be listed on the initial shareholder jurisdictional consent with its stock ownership percentage. A nonresident shareholder that does not consent to New Jersey jurisdiction is considered nonconsenting, and the S corporation must consent to the assumption of any tax liabilities on the nonconsenting shareholder’s behalf when filing Form CBT-100S. 

New Jersey C Corporation Status

Electing C Corporation Tax Status

A federal S corporation may elect to be a New Jersey C corporation – that is, a hybrid corporation – if all shareholders consent. A record of the consenting votes must be retained by the corporation and provided to the Division or DORES if requested. 

The hybrid corporation makes estimated payments as though it were a C corporation and files the applicable corporation business tax return (meaning a return other than Form CBT-100S), on which it indicates that it is a hybrid corporation. 

The S corporation has until the later of the return’s original due date or extended due date to decide to be taxed as a hybrid corporation. That is also the deadline for shareholders to elect hybrid corporation status. Note: Only passthrough entities can elect to pay the passthrough entity business alternative income tax (PTE/BAIT), and calendar-year taxpayers must make that election by March 15 of the following year. Although a federal S corporation has until the later of the original or extended due date to decide which New Jersey return to file, the Division will not allow retroactive PTE/BAIT elections; the election must be made by March 15.

Revoking the Election

 A C corporation tax status election may be revoked by the consent of shareholders holding more than 50% of the shares of the federal S corporation’s stock. Like the C corporation tax status election, the record of revocation must be retained by the corporation and provided to the Division or DORES if requested. 

To be effective on the first day of the privilege period, the revocation of C corporation tax status must be finalized on or before the 15th day of the third month of the privilege period.

S Corporations That Were Hybrids Before December 22, 2022

A federal S corporation that decided before December 22, 2022, to be taxed as a C corporation for New Jersey purposes – that is, that did not make the New Jersey S corporation election – may continue to be taxed as such by filing the applicable corporation business tax return (other than Form CBT-100S) and indicating that it is a hybrid corporation. If a hybrid corporation decides in a subsequent period to be a New Jersey S corporation, it will need to submit the shareholder jurisdictional consent and a copy of the federal acceptance letter as part of its Form CBT-100S.

Combined Reporting Concerns

An S corporation that elects C corporation tax status is subject to the rules governing unitary combined reporting for corporation business tax purposes. Further analysis is recommended if a taxpayer believes it may have a New Jersey combined reporting requirement because of its unitary relationship with affiliated entities also taxed as C corporations.

Alternatively, an S corporation can make an election under N.J.S.A. 54:10A-4(ff) to be included as a member of a combined group and taxed as a C corporation – that is, to have hybrid corporation status. It is unclear if that election is subject to the same procedural requirements as the C corporation tax status election (100% shareholder consent) instituted by the new law. Further analysis is recommended if an S corporation is considering making an election under N.J.S.A. 54:10A-4(ff) to be included as a member of a combined group and taxed as a C corporation.