SENATE STATE GOVERNMENT COMMITTEE

STATEMENT TO

SENATE, No. 231

with committee amendments

STATE OF NEW JERSEY

DATED: MARCH 14, 1996

      The Senate State Government Committee reports favorably and with committee amendments Senate, No. 231.

      As amended by the committee, the bill provides fixed tax rates for S corporations, 2% for corporations with annual income in excess of $100,000 and 0.5% for corporations with annual income of $100,000 or less.

      Under subchapter S of the federal Internal Revenue Code, certain business corporations with 35 or fewer shareholders may elect special tax treatment for most of their corporate income. Currently, New Jersey allows corporations that have elected the federal S corporation treatment to elect special New Jersey taxation, including a reduced tax rate. The corporation business tax rate for S corporation income is currently determined as the difference between the corporation business tax rate (currently 9% for corporations with annual income in excess of $100,000 and 7.5% for corporations with annual income of $100,000 or less) and the highest marginal rate under the New Jersey gross income tax (currently 6.37%), so the S corporation tax rate for the 1996 tax year will be 2.63% for corporations with annual income in excess of $100,000 and 1.13% for corporations with annual income of $100,000 or less.

      The bill sets the tax rate for S corporations at 2% for corporations with annual income in excess of $100,000 and 0.5% for corporations with annual income of $100,000 or less for tax years 1997 and thereafter.

      This bill was prefiled for introduction in the 1996 session pending technical review. As reported, the bill includes the changes required by technical review which has been performed.

COMMITTEE AMENDMENTS

      The committee amended the bill to: 1) incorporate changes made by P.L.1995, c.246, which provided a tax rate of 7.5 % for corporations with annual income of $100,000 or less, 1.5% less than the regular 9% tax rate for corporations; and 2) provide a tax rate of 0.5%, or 1.5% less than the regular S corporation rate, for S corporations with annual income of $100,000 or less.