With the enactment of A.B. 4295 on December 22, 2022, New Jersey became the latest state to amend their tax laws to automatically conform to the federal S corporation election. 

Historically, most states have recognized the federal S corporation election. New Jersey, however, has required a separate state election. Entities that did not comply were automatically treated as a C corporation for New Jersey Corporation Business Taxes (CBT). Effective for tax years beginning after December 22, 2022, if a New Jersey taxpayer has made a valid federal S corporation election, they are automatically treated as an S corporation for New Jersey CBT and gross income taxes. 

While this change is welcome by most practitioners and taxpayers, this is a significant shift that may catch many by surprise. If you previously did not separately elect New Jersey S status and think you may want to continue to be treated as a New Jersey C Corporation, you must carefully consider the impact of this new law. 

How Can Your Federal S Corporation Maintain New Jersey C Corporation Status?

For federal S corporations that would like to continue or newly elect New Jersey C corporation tax status, the new law provides an opt-out provision. If you wish to be taxed as a New Jersey C corporation you must do the following:

• Receive consent of 100% of your shareholders. 
• Timely remit a New Jersey S status opt-out, effective for tax years beginning after December 22, 2022.
  • You can make opt-out election at any time during the tax year applicable, or at any time on or before the due date or extended due date of the S corporation’s tax return. The New Jersey corporate tax return for calendar year taxpayers is due April 15 each year, and the extended due date is October 15.
• Know that the New Jersey C corporation election is effective for the tax year for which you timely make the election and for each succeeding tax year, until revoked. 
  • To revoke the New Jersey C corporation election, it must submitted by shareholders holding greater than 50% of stock on the day the revocation is made.

What Are the Tax Implications of New Jersey C Corporations Versus S Corporations? 

There are numerous differences in how New Jersey taxes C corporations in comparison to S corporations and their owners. We have noted a few of these considerations below, but you must weigh your own particular facts and circumstances.

• 2022 New Jersey C Corporation Taxes
  • 11.75% flat corporate tax rate
  • Single sales factor apportionment
  • State corporation income tax deductible by entity for federal tax purposes
• 2022 New Jersey S Corporation Taxes
  • S Corporations are subject to a minimum fee, but owners (not S Corporation) are traditionally subject to New Jersey income tax at graduated rates
• New Jersey nonresident individual owners traditionally apportion income using an evenly weighted three factor formula and are subject to graduated tax rates of 1.4% to 10.75%
• If an S corporation elects to file a composite return on behalf of non-resident owners, the highest individual tax bracket of 10.75% will apply.
  • BAIT Election: Effective 2021, New Jersey S corporations and their owners may elect to pay tax at the S corporation to minimize the federal $10,000 state and local tax cap imposed on owners.
• S corporations are generally subject to tax on single sales factor apportioned income
• Graduated tax rates of 5.675% to 10.9%
• BAIT tax deductible by entity for federal tax purposes

It is very important to work with your tax adviser to evaluate the most advantageous option available in the current year and future years.

Contact Gregg Dektor at gdektor@cohencpa.com, Karen Raghanti at kraghanti@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.