Could a New Jersey resident S corporation shareholder claim a credit for another state's tax on S corporation income allocated to New Jersey?

Plain-English summary

A New Jersey resident shareholder could not claim an other-jurisdiction tax credit for S corporation income allocated to New Jersey.

N.J.S.A. 54A:4-1(c) specifically barred the resident credit for another state's income or wage tax imposed on S corporation income allocated to New Jersey.

The TAM distinguished income properly allocated outside New Jersey. When the S corporation paid qualifying income-based tax in both jurisdictions and was eligible for the related credit on its New Jersey CBT-100S, the doubly taxed corporate income could be treated as S corporation income allocated outside New Jersey for Gross Income Tax purposes.

A minimum tax paid to another state did not satisfy that test. If the S corporation did not or could not take the other-jurisdiction credit on Form CBT-100S, its resident shareholder could not claim the corresponding NJ-1040 credit for income allocated to New Jersey.

The TAM also described allocation-factor relief under N.J.S.A. 54:10A-8 and N.J.A.C. 18:7-8.3. Approved allocation outside New Jersey could flow through to resident shareholders and support a credit for the outside-state income.

What this means for you

Resident S corporation shareholders

Start with the corporation's New Jersey allocation. Paying personal tax elsewhere did not override the statutory bar for income allocated to New Jersey.

S corporations

Validate the business allocation and the corporation-level credit before passing other-state treatment to shareholders.

Tax preparers

Do not treat another state's minimum tax as an income-based tax satisfying the TAM's criteria.

Common questions

Q: Could the shareholder claim a credit for tax on income allocated to New Jersey?
A: No.

Q: Did an S corporation's minimum tax to another state qualify?
A: No.

Q: When could relief flow through to the shareholder?
A: When income was validly allocated outside New Jersey under the rules described and the corporation-level treatment supported it.

Q: What if the corporation could not claim the CBT-100S credit?
A: The shareholder could not claim the related resident credit for income allocated to New Jersey.

Citations and references

• N.J.S.A. 54A:4-1 and 54A:4-1(c) — credit for taxes paid to other jurisdictions
• N.J.A.C. 18:35-1.5(c)6 and 7 — S corporation allocation and credit rules
• N.J.S.A. 54:10A-6 — statutory allocation
• N.J.S.A. 54:10A-8 and N.J.A.C. 18:7-8.3 — allocation-factor adjustments

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam10.pdf

Original ruling text

Credit For Taxes Paid to Other Jurisdictions- S Corporation Income
TAM 2011-10 – Issued February 10, 2011
Tax: Gross Income Tax
The New Jersey Division of Taxation continues to maintain its long-standing position that a
resident S Corporation shareholder that pays tax to other jurisdictions on S Corporation income
allocated to New Jersey is not eligible for a credit for taxes paid to other jurisdictions on that
income on the Gross Income Tax resident return (NJ-1040).
The credit for taxes paid to other jurisdictions is provided under the Gross Income Tax Act at
N.J.S.A. 54A:4-1 and allows taxpayers to take a credit against the tax otherwise due under this
Act for the amount of any income tax or wage tax imposed for the taxable year by another state
on their income tax return. The credit is limited in N.J.S.A. 54A:4- 1(c) with regard to taxpayers
that are S Corporation shareholders by stating that: “No credit shall be allowed against the tax
otherwise due under this act for the amount of any income tax or wage imposed for the taxable
year on S Corporation income allocated to this State.”
When an S Corporation allocates 100% of its income to New Jersey and this same S Corporation
pays a tax based on or measured by income to both another state and to New Jersey, the S
Corporation is eligible for a credit against its tax on the New Jersey Corporation Business Tax S
Corporation return (CBT-100S). See N.J.A.C. 18:35-1.5(c)7. For New Jersey Gross Income Tax
purposes, the Corporate Income taxed by both the other state and on the New Jersey CBT-100S
return is deemed S Corporation income allocated outside of New Jersey.
The payment of a minimum tax to another state by an S Corporation does not fulfill the above
criteria and the income is not deemed to be S Corporation income allocated outside of New
Jersey under N.J.A.C. 18:35-1.5(c)6.
In addition, for all CBT-100S filers, beginning with the 2007 tax year, there is no longer a tax on
income of the S Corporation that is not subject to Federal Corporate taxation. Therefore, only
income of the S Corporation that is subject to Federal Corporation tax and subject to a
Corporate Tax based on or measured by income in both another state and on the New Jersey
CBT-100S return, and which is eligible for a credit on the New Jersey CBT-100S return, will meet
the criteria for income deemed to be S Corporation income allocated outside New Jersey.
Thus, if a New Jersey S Corporation allocates 100% of its income to New Jersey but does not, or
cannot, take a credit for taxes paid to other jurisdictions on the CBT-100S return then a resident
shareholder is not entitled to a credit for taxes paid to other jurisdictions on the Gross Income
Tax return for S Corporation income allocated to New Jersey.
S Corporation income allocated to New Jersey means income statutorily allocated pursuant to
N.J.S.A. 54:10A-6. Taxpayers maintaining a regular place of business outside New Jersey use
Schedule J on the CBT-100S return in accordance with N.J.S.A. 54:10A-8. The application of
N.J.S.A. 54:10A-8 is through the Division’s CBT regulation N.J.A.C. 18:7-8.3.

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N.J.A.C. 18:7-8.3 provides that if it appears that the business allocation factor computed on the
basis of all or any of the property-receipts-payroll fractions does not properly reflect the activity,
business receipts, capital, entire net worth or net income of the taxpayers in New Jersey, the
Director may adjust or the taxpayer may request an adjustment of the business allocation factor.
To address the issue of an adjustment of the business allocation factor, the Individual Tax Audit
Branch and the Office Audit Branch are working to ensure that the allocation factor relief
claimed by S Corporations is valid and that validated and approved allocations are extended
accordingly to the individual shareholders in the filing of their Gross Income Tax returns with
regard to any credit for taxes paid to other jurisdictions that may be warranted.
As of July 1, 2010, the Corporation Business Tax’s statutory requirement that a corporation must
maintain a regular place of business, other than a statutory office, outside of New Jersey in order
to allocate income inside and outside of New Jersey has been eliminated. Many S Corporations
that were previously precluded from allocating because they did not meet the statutory
requirement are now able to do so. This relief will flow through to S Corporation resident
shareholders who will be eligible for a credit for taxes paid to other jurisdictions on the S
Corporation income allocated outside of New Jersey.

Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law,
regulations, or Division policies. It is accurate on the date issued. Subsequent changes in the law
or regulations, judicial decisions or changes in Division policies could affect the validity of the
information presented in a TAM.

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