Tardy S Corporation Election in New Jersey

In a previous article on why a Tardy S Election Is No Reason To Freak Out, we discussed making a late federal S corporation election under a 2013 Revenue Procedure that permits corporations to obtain relief for a late S election that is made within 3 years and 75 days from the effective date of the election.[1] But what effect does a late S election have in New Jersey, which requires an S corporation to make a separate election to be treated as a New Jersey S corporation?

Because it is a prerequisite to being treated as a New Jersey S corporation that the corporation have made a federal S election,[2] IRS approval of a federal S election is required before a corporation can apply for retroactive New Jersey S corporation status, although New Jersey law does not actually say that in so many words. Instead, the relevant regulations provide that a corporation may file a retroactive election to be recognized as a New Jersey S corporation if the corporation (1) is authorized to business in New Jersey, (2) is registered with the Division of Taxation, (3) has filed Form CBT-100S tax returns with New Jersey, but (4) has failed to file a timely New Jersey S corporation election.[3] In addition, a retroactive New Jersey S corporation will not be granted if: (1) all appropriate corporation business tax returns have not been timely filed and taxes timely paid as if the New Jersey S corporation election request had been previously approved; (2) a New Jersey S corporation request is not received before an assessment becomes final; (3) the Division of Taxation has issued a notice denying a previous late-filed New Jersey S election request, and the taxpayer has not protested the denial within 90 days; or (4) all shareholders have not filed appropriate tax returns and paid tax in full when due as if the New Jersey S corporation election request had been previously approved, and the taxpayers have not reported the appropriate S corporation income on their returns.[4]

An application for retroactive New Jersey S corporation status is made by filing Form CBT-2533-R (Retroactive S Election Application) with the Division of Revenue, together with Form CBT-2553 (New Jersey S Corporation or New Jersey QSSS Election). In addition, the corporation must pay an administrative user fee of $100 for each tax year that will be affected by the late filing.[5]

[1] Rev. Proc. 2013-30 § 4.02, 2013-36 I.R.B. 173.

[2] See N.J. Stat. Ann. §§ 54:10A-4(o), (p), 54:10A-5.22(a); N.J. Admin. Code § 18:7-20.1(a)(1), (2), (c) (available through LexisNexis®).

[3] N.J. Admin. Code § 18:7-20.3(a); Xylem Dewatering Sols., Inc. v. Dir., Div. of Taxation, 30 N.J. Tax 41, 55 (2017). Before the adoption of section 18:7-20.3 in 2008, New Jersey did not have a retroactive New Jersey S corporation election procedure. See Shree Ram Invs., Inc. v. Dir., Div. of Taxation, No. A-0600-11T4, 2013 WL 4033629 (N.J. Super. Ct. App. Div. Aug. 9, 2013). The regulation was adopted to assist “honest taxpayers” who had inadvertently failed to make a New Jersey S election “with a procedure that is less draconian in its consequences than requiring the corporate taxpayer to pay tax, penalty and interest on the difference between the S corporation rates and the C corporation rates, requiring the difference between the S corporation rates and the C corporation rates, requiring the shareholders to file amended NJ-1040 returns to get refunds, and deal with the potential disparity in the statute of limitations between corporation business tax and gross income tax.” Xylem, 30 N.J. Tax at 55.

[4] N.J. Admin. Code § 18:7-20.3(c).

[5] See id. § 18:7-20.3(b).