Did New Jersey permit a partnership's federal I.R.C. § 754 basis adjustment for Gross Income Tax purposes, and how was it reported?

Plain-English summary

New Jersey permitted a partnership's federal I.R.C. § 754 basis adjustment and required the partnership and partners to carry it through their New Jersey reporting.

The federal election could increase or decrease the basis of partnership property depending on the incoming partner's purchase price and the partnership's basis. It applied to all partnership property, not only depreciable property.

The partnership—not each individual partner—made choices affecting partnership income. For New Jersey purposes:

• the federal § 754 adjustment was permitted;
• supporting documentation had to be retained and supplied if requested;
• the partnership reported each partner's adjustment as supplemental information to Form NJK-1; and
• the partner adjusted the distributive share of partnership income or loss and reported the net amount on Form NJ-1040.

What this means for you

Partnerships

Track each partner's § 754 adjustment and provide it with the New Jersey Schedule NJK-1 information.

Partners

Use the reported adjustment to modify the distributive share entered on the New Jersey resident return.

Tax preparers

Retain the election and basis computations because the Division may request support.

Common questions

Q: Did New Jersey recognize the federal § 754 election?
A: Yes.

Q: Could the adjustment decrease basis?
A: Yes. The TAM says it could be an increase or decrease.

Q: Did it apply only to depreciable assets?
A: No. It applied to all partnership property.

Q: Where did the partnership report the adjustment?
A: As supplemental information to Form NJK-1.

Citations and references

• I.R.C. § 754 — partnership property basis election
• N.J.S.A. 54A:5-1(k) — partnership income
• N.J.A.C. 18:35-1.3 — partnership taxation

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam8.pdf

Original ruling text

Partnership Deduction under IRC§ 754
TAM - 2011- 8 – Issued February 9, 2011
Tax: Gross Income Tax
Pursuant to Internal Revenue Code section 754, a partnership may file an election to adjust the
basis of the partnership property for federal tax purposes. This basis adjustment to partnership
property could be either an increase or decrease in basis depending on the new partner’s
purchase price and the partnership’s basis in its property.
In addition, the basis adjustment applies to all partnership property and not only depreciable
property.
For New Jersey purposes, partnerships are taxed in accordance with N.J.A.C. 18:35-1.3 and
N.J.S.A. 54A:5-1(k). All choices affecting the determination of income from the partnership are
made by the partnership, not each partner.
Thus, federal adjustments such as an IRC §754 election are permitted for New Jersey income tax
purposes. Supporting documentation for any adjustments should be retained and made
available to the Division if requested.
The partnership should report each partner’s IRC §754 adjustment as “Supplemental
Information” to Form NJK-1.
The partners will then adjust their reported distributive share of partnership income (loss) by the
IRC §754 adjustment and report the net amount on their NJ-1040.

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.

Page 1