"Hybrid" means a Federal S corporation that has not made the New Jersey S corporation election, and the corporation conducts business both inside and outside New Jersey.
"Pro rata share" means the portion of any items attributable to an S corporation shareholder determined in accordance with I.R.C. §§ 1377 and 1362.
"S corporation" means a corporation that meets the Federal definition under I.R.C. § 1361, regardless of whether a New Jersey S corporation election was made.
"S corporation income" means the net of an S corporation's items of income, loss, or deduction determined without exclusion of items of income properly taxable or deduction of expenses or losses prohibited for gross income tax purposes.
Example: On its New Jersey corporation business tax (CBT) return, an S corporation reports entire net income of $ 15,000 and a New Jersey allocation factor of 100 percent. The S corporation is required to pay a corporate income tax to another state on $ 3,000 of income, which is also reported to and taxed by New Jersey. The duplicated income qualifies for inclusion in the S corporation's New Jersey calculation of a credit for taxes paid to other jurisdictions. For gross income tax purposes, $ 3,000 of income is deemed to be allocated outside New Jersey, and the entity is deemed to have allocated 20 percent of its income outside New Jersey.
Example: If an S corporation's fiscal year is October 1 through September 30 and a shareholder was a New Jersey resident through April 15th, the shareholder was a New Jersey resident for 197 days of the S corporation's fiscal year (October 1 - April 15) 197 days divided by 365 equals a residency percentage of 54 percent.
New Jersey allocation factor must be used to determine the income, other additions and adjustments, and dividends that are allocated to New Jersey.
Example 1. Complete liquidation of a New Jersey electing S corporation and the shareholder's stock are sold at a gain.
Facts:
S corporation's only transaction is the sale of its assets which resulted in a gain of $ 10,000.
Sole shareholder's Schedule NJ-K-1 reports $ 10,000 pro rata share of S corporation's gain from sale of its assets, all of which are allocated to New Jersey.
Shareholder's opening New Jersey basis in the stock and capital total $ 100.00.
Shareholder received a distribution of $ 14,000.
Reporting of transactions - The shareholder's pro rata share of the complete liquidation of the S corporation and the shareholder's gain or loss on disposition of the stock are separately reported in the category net gains or income from disposition of property.
Pro rata share of S corporation's gain | ||
Resident shareholder: | ||
from disposition of corporation's assets | $ 10,000 | |
Sale of stock: | ||
Liquidating distribution | $ 14,000 | |
Less: Opening NJ basis in stock | $ 100 | |
Pro rata share of S corp's gain reported | $ 10,000 | |
Ending NJ basis in stock | ($ 10,100) | |
Gain on disposition of S corporation stock | $ 3,900 | |
Net gains or income from disposition of property | $ 13,900 | |
Nonresident shareholder: | Everywhere Income | New Jersey Income |
Net gains or income from disposition of Property | $ 13,900 | $ 10,000 |
Shareholder reports Everywhere income as if a New Jersey resident.
The S corporation's gain allocated to New Jersey is New Jersey source income; the shareholder's gain from the sale of S corporation stock is not sourced to New Jersey by a nonresident.
Example 2. Complete liquidation of a New Jersey electing S corporation; shareholder's stock is sold at a loss.
Facts:
S corporation's only transaction was the sale of its assets which resulted in a gain of $ 10,000.
Sole shareholder's Schedule NJ-K-1 reports $ 10,000 pro rata share of S corporation's gain from sale of its assets, all of which is allocated to New Jersey.
Shareholder's opening New Jersey basis in the stock and capital total $ 5,000.
Shareholder received a distribution of $ 14,000.
Reporting of transactions - The shareholder's pro rata share of the complete liquidation of the S corporation and the shareholder's gain or loss on disposition of the stock are separately reported in the category net gains or loss on disposition of the stock are separately reported in the category net gains or income from disposition of property.
Resident shareholder: | ||
Pro rata share of S corporation's gain | ||
from disposition of S corporation's assets | $ 10,000 | |
Sale of stock: | ||
Liquidating distribution | $ 14,000 | |
Less: Opening NJ basis in stock | $ 5,000 | |
Pro rata share of S corporation's gain reported | $ 10,000 | |
Ending NJ basis in stock | ($ 15,000) | |
Loss on disposition of S corporation stock | ($ 1,000) | |
Net gains or income from disposition of property | $ 9,000 | |
Nonresident shareholder: | ||
Everywhere Income | New Jersey Income | |
Net gains from disposition of property | $ 9,000 | $ 10,000 |
Shareholder reports Everywhere income as if a New Jersey resident.
The S corporation's gain allocated to New Jersey is New Jersey source income; the shareholder's loss from the sale of S corporation stock is not sourced to New Jersey by a nonresident.
Example 3 - Sole shareholder of a New Jersey electing S corporation sells all of the stock at the end of the S corporation's tax year. The S corporation retains all of its assets and continues operation under new ownership.
Facts:
Shareholder's Schedule NJ-K-1 reports net pro rata share of S corporation income of $ 1,500, all of which is allocated to New Jersey.
Sole shareholder's opening New Jersey basis in the stock is $ 500.00
Shareholder sold the stock for $ 1,800.
Shareholder has gains of $ 900.00 from the sale of publicly traded shares of stock.
Reporting of transactions - Shareholder's net pro rata share of S corporation income is reported in the category net pro rata share. The gain or loss on disposition of the shareholder's shares of stock is reported in the category gains from disposition of property.
Resident shareholder: | ||
Net pro rata share of S corporation | ||
income | $ 1,500 | |
Net gains from disposition of property: | ||
Sale of S corporation stock: | ||
Sale proceeds | $ 1,800 | |
Less: Opening NJ basis in stock | $ 500.00 | |
Net pro rata share reported | $ 1,500 | |
Ending NJ basis in stock | ($ 2,000) | |
Loss on sale of S corporation stock | ($ 200.00) | |
Gains from sale of publicly traded stocks | $ 900.00 | |
Net gains from disposition of property | $ 700.00 | |
Nonresident shareholder: | ||
Everywhere Income | New Jersey Income | |
Net pro rata share of S corporation income | $ 1,500 | $ 1,500 |
Net gains from disposition of property | $ 700.00 | $0 |
Shareholder reports Everywhere income as if a New Jersey resident.
The shareholder's net pro rata share of income allocated to New Jersey is New Jersey source income; the shareholder's loss from the sale of S corporation stock is not sourced to New Jersey by a nonresident.
Example 4 - A Federal S corporation electing New Jersey election which allocates 100 percent to New Jersey is liquidated under an I.R.C. § 338(h)(10) election.
Facts:
Prior to the liquidation of the S corporation's assets, the S corporation had a net loss from operations of $ 850.00 and interest income of $ 70.00.
The S corporation recognized a gain of $ 10,000 from the deemed sale of the S corporation's assets.
Sole shareholder's Schedule NJ-K-1 reports a net pro rata share of S corporation loss in the amount of $ 780.00 all of which is allocated to New Jersey; and a pro rata share of gain from the S corporation's deemed sale of assets in the amount of $ 10,000.
Shareholder's opening NJ basis in their stock was $ 2,100.
Shareholder received a liquidating distribution of $ 15,000.
Reporting of transactions - Income and losses from corporate activity prior to the liquidation of the corporation's assets are reported in the category net pro rata share of S corporation income. The S corporation's gain or loss on disposition of its assets is reported in the category, net gains from the disposition of property. The shareholder's net gains or loss on disposition of the S corporation stock is reported in the category, net gains from the disposition of property.
Resident shareholder: | ||
Net pro rata share of S corporation | ||
income - loss | ($ 780.00) | $0 |
Net gains from disposition of property: | ||
Pro rata share of S corporation's gain | ||
on sale of assets | $ 10,000 | |
Sale of stock: | ||
Liquidating distribution | $ 15,000 | |
Opening NJ basis in stock | $ 2,100 | |
Add: pro rata share of S corporation's | ||
Gain on sale of assets | $ 10,000 | |
Less: pro rata loss reported | ($ 780.00) | |
Add: Unused net Pro Rata loss | $ 780.00 | |
NJ basis | ($ 12,100) | |
Gain from sale of S corporation stock | $ 2,900 | |
Net gains from disposition of property | $ 12,900 | |
Nonresident shareholder: | ||
Everywhere Income | New Jersey Income | |
Net pro rata share of S corporation income (loss) | 0 | 0 |
Net gains from disposition of property | $ 12,900 | $ 10,000 |
Shareholder reports Everywhere income as if a New Jersey resident
The shareholder's gain from the sale of S corporation stock is not sourced to New Jersey by a nonresident.
Example 5 - A Federal S corporation which did not make the New Jersey S election and allocates all of its income to New Jersey sells all of its assets and dissolves. The shareholder receives a liquidating distribution in payment for their stock.
Facts:
S corporation had a net loss from operations in the amount of $ 3,750.
Sale of the S corporation's assets resulted in a net gain of $ 19,000.
Shareholder's cost of the stock was $ 3,000.
Shareholder received a liquidating distribution of $ 15,000.
Reporting of transactions - For New Jersey tax purposes the shareholder owns stock in a C corporation. The shareholder does not have reportable net pro rata share of S corporation income from this corporation. The shareholder's gain or loss from liquidation of the corporation's stock is reported in the category net gains from disposition of property.
Resident shareholder: Sale of stock: Sale proceeds - liquidating distribution | $ 15,000 |
Less: Cost of stock | ($ 3,000) |
Gain from disposition of property | $ 12,000 |
Nonresident shareholder:
For a nonresident shareholder there is no New Jersey source income from this transaction. If the nonresident has a New Jersey filing requirement due to other New Jersey activity, this transaction would be included in Everywhere income as if a resident.
Everywhere Income | New Jersey Income | |
Gain from disposition of property | $ 12,000 | $0 |
Example 6 - A hybrid corporation (a Federal S corporation that did not make the New Jersey S election and which allocates its income both inside and outside New Jersey), sells all of its assets and the shareholder's stock is liquidated.
Facts:
Corporation had net income of $ 3,750 from operations prior to liquidation of the assets.
Sale of corporation's assets resulted in a net gain of $ 19,000.
The corporation's New Jersey allocation factor is 45 percent; the allocation factor outside of New Jersey is 55 percent.
Shareholder received a liquidating distribution of $ 15,000.
Opening balance of NJ AAA of $ 1,900.
Shareholder's cost of the stock was $ 3,000.
Reporting of transactions - For New Jersey tax purposes the shareholder owns stock in both a Federal S corporation and a New Jersey C corporation. The corporation's allocation factor inside of New Jersey determines the shareholder's New Jersey C corporation income and the costs and proceeds attributable to the sale of C corporation stock. The corporation's allocation factor outside of New Jersey determines the shareholder's Federal S corporation income allocated outside of New Jersey and the shareholder's New Jersey stock basis and sale proceeds attributable to the sale of Federal S corporation stock.
New Jersey C corporation Income | Federal S corporation income not Allocated to New Jersey | ||
45% | 55% | ||
Net pro rata share of income | 3,750 | $0 | $ 2,063 |
Net gains from disposition of property: | |||
Pro rata share of gain from disposition of corporation's assets $19,000 | $0 | $ 10,450 | $ 10,450 |
Liquidation of stock: | |||
Sale proceeds $ 15,000 | $ 6,750 | $ 8,250 | |
Less: Costofstock $3,000 | ($ 1,350) | ($ 1,650) | |
NJ AAA opening balance | n/a | ($ 1,900) | |
Net pro rata share of income reported | n/a | ($ 2,063) | |
Pro rata share of gain from asset sale reported | n/a | ($ 10,450) | |
Gain on sale of C corporation stock | $ 5,400 | $ 5,400 | |
Loss on sale of S corporation stock | ($ 7,813) | ($ 7,813) | |
Net gains from disposition of property | $ 8,037 |
Resident shareholder:
A resident shareholder must report the Federal S corporation income from operations prior to liquidation of the assets allocated outside of New Jersey, $ 2,063 as net pro rata share of S corporation income. The corporation's income allocated inside of New Jersey is from a New Jersey C corporation and is not reportable.
The shareholder's reports as net gains from disposition of property, the gain allocated outside of New Jersey and attributed to the corporation's sale of assets, $ 10,450; the gain attributed to disposition of New Jersey C corporation stock, $ 5,400; and the loss attributed to disposition of Federal S corporation stock, ($ 7,813).
Net pro rata share of S corporation income: | $ 2,063 |
Net gains or income from disposition of property: | $ 10,450 |
Gain on sale of S corporation assets allocated outside New Jersey | $ 5,400 |
Gain on sale of New Jersey C corporation stock | ($ 7,813) |
Loss on sale of Federal S corporation stock | $ 8,037 |
Nonresident shareholder:
For a nonresident shareholder there is no New Jersey source income from these transactions. If the nonresident has a New Jersey filing requirement due to other New Jersey activity, this transaction would be included on the nonresident return in the following manner:
Everywhere Income | New Jersey Income | |
Net pro rata share of S corporation income | $ 2,063 | $0 |
Gain from disposition of property | $ 8,037 | $0 |
N.J. Admin. Code § 18:35-1.5