A1797

An Act allowing New Jersey S corporations to elect to transfer corporation business tax credits to their shareholders to apply against the shareholders' gross income tax liability, supplementing P.L.1945, c.162 (C.54:10A-1 et seq.) and Title 54A of the New Jersey Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. a. Notwithstanding the provisions of any other law to the contrary, a New Jersey S corporation may make an election for a privilege period to (1) not apply an amount of one of the tax credits enumerated in subsection c. of this section allowed for the privilege period against its corporation business tax liability for that privilege period, and (2) instead transfer the credit to its shareholders for application against their respective gross income tax liabilities for the shareholder taxable years in which that privilege period ends. The election to transfer an amount of credit to shareholders, which may not be rescinded, shall preclude the application of that amount of credit against the liability imposed pursuant to section 5 of P.L.1945, c.162 (C.54:10A-5). An amount of credit for which an election has been made pursuant to section 1 of P.L. , c. (C. ) (pending before the Legislature as this bill) shall be transferred to shareholders in proportion to their ownership interest in the New Jersey S corporation.

b. The verification of credit amounts, the methodology and timing of the election, the notification of the shareholders, and the determination and verification of amounts of credit transferred to each shareholder, shall be as the Director of the Division of Taxation in the Department of the Treasury shall prescribe.

c. The corporation business tax credits to which this section applies are:

the credit allowed pursuant to section 1 of P.L.1993, c.150 (C.27:26A-15);

the credit allowed pursuant to section 56 of P.L.2002, c.43 (C.52:27BBB-55);

the credit allowed pursuant to section 3 of P.L.2001, c.415 (C.52:27D-492);

the credit allowed pursuant to section 19 of P.L.1983, c.303 (C.52:27H-78);

the credit allowed pursuant to section 3 of P.L.1993, c.170 (C.54:10A-5.6);

the credit allowed pursuant to section 3 of P.L.1993, c.171 (C.54:10A-5.19);

the credit allowed pursuant to section 1 of P.L.1993, c.175 (C.54:10A-5.24);

the credit allowed pursuant to section 3 of P.L.1997, c.349 (C.54:10A-5.30);

the credit allowed pursuant to section 1 of P.L.2001, c.321 (C.54:10A-5.31);

the credit allowed pursuant to section 1 of P.L.2003, c.296 (C.54:10A-5.33); and

the credit allowed pursuant to section 12 of P.L.1985, c.227 (C.55:19-13).

2. a. An amount of credit for which an election has been made pursuant to section 1 of P.L. , c. (C. ) (pending before the Legislature as this bill) shall be transferred to shareholders in proportion to their ownership interest in the New Jersey S corporation. A shareholder shall be allowed to apply the credit against the tax due pursuant to N.J.S.54A:2-1 or section 4 of P.L.1993, c.178 (C.54A:2-1.1) for the taxpayer's taxable year in which the privilege period to which the New Jersey S corporation election applies ends. The amount of credit applied shall not exceed 50% of that amount of the taxpayer's liability for tax for the taxable year that bears the same proportional relationship to the total amount of such liability as the lesser of:

(1) the amount of the taxpayer's pro rata share of S corporation income from the electing New Jersey S corporation for the taxable year; or

(2) the amount of the taxpayer's net pro rata share of S corporation income determined pursuant to subsection p. of N.J.S.54A:5-1 for the taxable year;

bears to the taxpayer's entire gross income for that year.

The amount of the credit otherwise allowable under this section which cannot be applied for the taxable year due to the limitations of this subsection shall expire.

b. The determination of amounts of credit transferred to each shareholder, and the method of shareholder application of credit amounts transferred, shall be as the Director of the Division of Taxation in the Department of the Treasury shall prescribe.

3. This act shall take effect immediately and section 1 shall apply to privilege periods beginning after enactment and section 2 shall apply to the taxable years in which or with which those privilege periods end.

STATEMENT

This bill allows New Jersey S corporations to elect to transfer corporation business tax credits to shareholders to apply against gross income tax liability.

Most large C corporations pay State corporation business tax on profits at the rate of 9%. Subchapter S corporations pay corporation business tax at a reduced rate, currently at a 1.33% rate that is scheduled to phase down to a zero rate for Tax Year 2007 and thereafter. A wide range of credits are available under the corporation business tax to provide incentives for employee benefits, encourage investment in communities in need of redevelopment, encourage job creation, and promote investment in infrastructure located in New Jersey. These corporation business tax credits are typically limited to reducing tax liability by half, so a typical credit can reduce the tax liability of a large C corporation from 9% to 4.5%, a substantial incentive. Because the liability of a subchapter S corporation can only be reduced from 1.33% to 0.66%, these credits provide much less incentive to subchapter S corporations to do the things the credits are designed to promote.

This bill allows subchapter S corporations to elect to pass the corporate level credits through to their shareholders, for the purpose of allowing the shareholders to reduce their individual New Jersey gross income tax liabilities on the income they are deemed to have received from the subchapter S corporation.

The bill allows this pass-through for the Alternate Commuting Credit, the Urban Enterprise Zone New Employment Credit, the Qualified Municipality Open For Business Credit, the Neighborhood Revitalization Credit, the New Jobs Investment Tax Credit, the Manufacturing Equipment and Employment Investment Credit, the Research and Development Credit, the Water Treatment Equipment Credit, and the Urban Development Project Employment Tax Credit.