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Understanding New Jersey’s New Income Tax Economic Nexus Law for 2023

Understanding New Jersey's New Income Tax Economic Nexus Law for 2023, Frazier & Deeter

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    New Jersey recently introduced a significant change to its income tax laws with the enactment of an economic nexus provision, effective July 3, 2023. This law, outlined in Tax Bulletin TB-108(R) issued on January 18, 2024, aims to redefine when companies are liable for New Jersey corporate business tax based on economic activity rather than physical presence alone.

    Key Provisions of the Economic Nexus Law

    Under this new law, companies are deemed to have economic nexus in New Jersey if they meet either of the following criteria during a calendar year:

    1. Sales Threshold: Companies with sales exceeding $100,000 in New Jersey, or
    2. Transaction Threshold: Companies with 200 or more transactions within the state.

    If a company’s activities fall within the protections of P.L. 86-272, as specified in the bulletin, they are exempt from paying income tax but must still file a corporate business tax return and pay the minimum tax.

    Minimum Tax Requirements

    The minimum tax obligations for both C corporations and S corporations are based on New Jersey gross receipts, structured as follows:

    C Corporations:

    • Less than $100,000 in gross receipts: $500 minimum tax
    • $100,000 or more but less than $250,000: $750 minimum tax
    • $250,000 or more but less than $500,000: $1,000 minimum tax
    • $500,000 or more but less than $1,000,000: $1,500 minimum tax
    • $1,000,000 or more: $2,000 minimum tax

    S Corporations:

    • Less than $100,000 in gross receipts: $375 minimum tax
    • $100,000 or more but less than $250,000: $562.50 minimum tax
    • $250,000 or more but less than $500,000: $750 minimum tax
    • $500,000 or more but less than $1,000,000: $1,125 minimum tax
    • $1,000,000 or more: $1,500 minimum tax

    Special Considerations for Foreign Corporations

    Foreign corporations that meet filing requirements and whose income is protected under Public Law 86-272 must file Schedule N, Nexus-Immune Activity Declaration, and remit the minimum tax.

    Change in Treatment of S Corporation Elections

    Effective December 23, 2022, New Jersey adopted federal income tax treatment outlined in IRC Sec. 1361. This means that a federal S corporation election automatically applies for New Jersey purposes, simplifying the taxation process for S corporations.

    Prior to this date, S corporations had to make a separate election in New Jersey to be treated as such for state tax purposes. Federal S corporations that did not make this election were considered C corporations for New Jersey income tax purposes.

    Tax Implications for New Jersey S Corporations

    New Jersey S corporations are generally exempt from the corporation business tax if their entire net income is not subject to federal corporate income tax. However, specific types of income, such as built-in gains and excess passive income, are still subject to taxation under New Jersey law.

    Additionally, New Jersey S corporations are subject to a minimum tax but are exempt from the alternative minimum assessment.

    These updates reflect New Jersey’s efforts to modernize its tax laws and align them more closely with federal standards, aiming to provide clarity and consistency for businesses operating within the state. For more detailed guidance on how these changes may affect your company, reach out to our team of SALT experts.

    Contributors

    Brian Strahle, Partner and National Practice Leader, State & Local Tax | brian.strahle@frazierdeeter.com

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