New Jersey tax legislation adopts federal partnership audit regime, eliminates state S-Election
On Dec. 22, 2022, New Jersey Gov. Murphy signed into law Bill A-4295/S-2876 (the Act), which enacts three significant tax provisions: 1) ending COVID-related state tax extensions; 2) eliminating the requirement to affirmatively elect New Jersey S Corporation status; and 3) adopting the new federal partnership audit regime under gross income tax. Read on for a brief summary of these changes.
During the height of the COVID-19 pandemic, New Jersey had suspended the statute of limitations associated with various tax assessments, as well as the requirement that New Jersey pay interest to taxpayers on tax overpayments. The Act has ended both of these suspensions as of Dec. 22, 2022. Accordingly, the Act provides that any assessments made on or after Dec. 22, 2022, that would have been barred but for the statute of limitations suspension will be voided, and any amounts collected after Dec. 22, 2022, will be refunded.
The Act made significant changes to the New Jersey S corporation election requirements. Previously, New Jersey S corporations were required to make both a valid federal and state S-election. New Jersey had been one of a few states requiring its own separate state S-election. The Act now ends this requirement, allowing a corporation holding a valid federal S-election to be automatically recognized as a New Jersey S corporation, unless 100% of the shareholders affirmatively opt out of S status.
The Act amends portions of the New Jersey Gross Income Tax Act (GIT) and the Corporation Business Tax Act (CBT) to adopt the regime created under the federal Bipartisan Budget Act of 2015. This regime will now conform New Jersey to the federal scheme as well as the model statute drafted by the Multistate Tax Commission. The Act will bring New Jersey into conformity with federal partnership-level auditing requirements. This includes various timing and notification requirements when federal adjustments are made. Additionally, under the Act New Jersey has now conformed to the federal requirement that partnerships must elect a partnership representative to perform various actions following the close of any federal audit or adjustment, which includes notifying the state Division of Taxation of such changes.
The Act provided significant changes affecting both the CBT and GIT that will impact partnership and S corporation taxpayers across multiple industries. As the Act was just enacted, it is anticipated that the Division will release guidance in the coming weeks. In the interim, contact your tax advisor if you have any questions on these various amendments.
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