New Rules: New Jersey Finally Follow Federal S Elections

On December 22, 2022, New Jersey Governor Murphy signed into law a new rule that eliminates the need to make separate New Jersey S elections. The law primarily conforms New Jersey’s laws regarding the making of S elections to federal law.

For many years, a corporation could elect to be treated as an S corporation for New Jersey tax purposes only if it affirmatively made a separate New Jersey election, in addition to the federal S election under IRC Sec. 1362. Under new laws effective for taxable years beginning after December 22, 2022, by default, New Jersey finally treats any corporation that has made a valid S corporation election for federal tax purposes as an S corporation for New Jersey tax purposes. This structure is in line with the vast majority of states that automatically afford S corporation status to a business entity that is a valid S corporation for federal income tax purposes.

Under the new act, a corporation may separately elect not to be treated as an S corporation under New Jersey law. This can be helpful if a corporation has a number of New Jersey nonresident shareholders who do not wish to file individual New Jersey Gross Income Tax returns in New Jersey and would have no other tax nexus with New Jersey. To make such an opt-out election, 100 percent of the shareholders must consent. The election 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 corporation’s tax return.

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