N.J. Admin. Code § 18:35-1.3

Current through Register Vol. 56, No. 21, November 4, 2024

Section 18:35-1.3 - Partnerships and partners

(a) The following words and terms, when used in this section, shall have the following meanings:

1. "Partner" means any owner of a partnership interest and shall include any taxpayer subject to the gross income tax who is a member of a partnership or other unincorporated entity taxed as a partnership. A partner cannot be an employee of the partnership for purposes of determining distributive share of partnership income. For the purposes of this section, a partner refers to the definition in this section, although a partner can at the same time also be a partner in a civil union, depending on the context.

2. "Partnership" means and shall include a syndicate, group, pools, joint venture, and any other unincorporated organization through or by means of which any business, financial operation, or venture is carried on and which is not a corporation, trust, or estate within the meaning of the New Jersey Gross Income Tax Act. Only entities that qualify and elect to be treated as partnerships for Federal tax purposes (for example, limited liability companies and limited liability partnerships) and are in business shall be treated as partnerships under the Gross Income Tax Act. For the purposes of this section, partnership refers to the definition in this section, although a partnership can at the same time also consist of partners in a civil union, depending on the context.

(b) Partners, not partnerships, are subject to tax. Taxpayer partners shall be subject to gross income tax on their distributive share of partnership income, whether or not distributed. Such income shall be reported as distributive share of partnership income, pursuant to 54A:5-1.k, regardless of the character or category of the income derived by the partnership.

1. Partners who are resident taxpayers of New Jersey are subject to gross income tax on their entire distributive shares of partnership income, regardless of the source of the income.

2. Partners who are nonresident taxpayers of New Jersey are subject to gross income tax on their distributive shares of partnership income, but only to the extent such income was derived by the partnership from sources within New Jersey. Refer to (d)4 below for rules governing sourcing or allocating income.

(c) Partnership income or loss reported on Form NJ-1065 shall be comprised of all income or loss received, derived, or incurred by the partnership and all expenses allowable under 18:35-1.1(d) that are not prohibited or limited under the Gross Income Tax Act, in accordance with the partnership's Federal method of accounting and reported in the same tax period as reported Federally.

(d) A partner's distributive share of partnership income or loss shall be comprised of the following:

1. Any and all income or loss earned by the partnership and passed through to the partner by the partnership for a taxable period shall be reported in the category of income distributive share of partnership income pursuant to 54A:5-1.k.

i. Each partner's respective percentage of distributive share of partnership income or loss shall be determined by the partnership agreement and allocated accordingly or in the manner determined to be allocable or allocated for Federal income tax purposes (or by Federal income tax authorities).

ii. The income or loss comprising a partner's distributive share of partnership income as set forth in (d)1 above shall be taxed and reported as the partner's distributive share of partnership income without regard to character or category of income earned, derived, or incurred by the partnership.

iii. TThe income or loss referred to in (d)1 above, shall be reported by the partner pursuant to 54A:5-1.k after taking into account:

(1) Expenses incurred directly by the partner in the conduct of partnership business for the tax period, in the manner and subject to the provisions and limitations provided in 18:35-1.1(d), and not prohibited under the New Jersey Gross Income Tax Act.

(2) Interest expense incurred by a partner on capital contributions required by the partnership for participation in the partnership, is deductible.

(3) Contributions to a Federal I.R.C. 401(k) plan are limited to the amount of the Federal exclusion as provided in 54A:6-21. Contributions or payments made to Keogh plans or other retirement/deferred compensation plans are not deductible expenses.

2. A complete liquidation of a partnership is deemed to occur in the tax year when the following events have occurred: the partnership and all its partners discontinue all partnership activities; all partnership assets have been distributed to the partners; and the partners are required to recognize gain or loss on the disposition of their partnership interests for Federal income tax purposes.

i. The partnership's gain or loss from the sale or disposition of its assets as a result of a complete liquidation are to be separately reported as net gains or income from disposition of property in accordance with 54A:5-1.c on the NJ-1065 and the partner's NJK-1s.

ii. A resident partner must report his or her share of the partnership's gain or loss from the sale or disposition of the partnership's assets as a result of a complete liquidation as net gain or income from the disposition of property in accordance with 54A:5-1.c. The partner will make a separate calculation to determine taxpayer's gain or loss on the sale of the partnership interest that is reported in accordance with 54A:5-1.c.

iii. A nonresident partner will report his or her distributive share of the partnership's gain or loss from the sale or disposition of its assets as a result of a complete liquidation as net gain or income from the disposition of property in accordance with 54A:5-1.c, and is included in both Columns A (Amount of Gross Income Everywhere) and B (Amount from New Jersey Sources) on Form NJ-1040NR. The partner makes a separate calculation to determine gain or loss on the sale of the partnership interest that is reported in accordance with 54A:5-1.c and included in Column A (Amount of Gross Income Everywhere) only on Form NJ-1040NR.

3. Guaranteed payments shall be reported as distributive share of partnership income, except guaranteed payments received by a retired partner who is receiving such payments as a result of a period of service to the partnership pursuant to a retirement agreement or pension plan. Such guaranteed payments will be treated as pension income to retired partners and shall be reported by the partner as pension income, described in 54A:5-1.j.

4. The allocation of partnership income derived from sources either inside or outside New Jersey, except for tiered partnerships and complete liquidations, shall be as follows:

i. If a partnership's activity is carried on solely within New Jersey, all items of income, gain, expense, or loss of the partnership are deemed to have been derived from sources within New Jersey. No allocation schedule is required.

ii. If a partnership's activity is carried on solely outside New Jersey, the partnership shall complete either New Jersey Business Allocation Schedule (Form NJ-1040-NR-A) or a schedule reflecting an approved allocation method under (d)4v below. Failure to provide such schedule results in allocation of all income to New Jersey.

iii. If a partnership's activity is carried on both inside and outside New Jersey, the portion of the partnership's income, gains, expenses, or losses attributable to sources within New Jersey shall, except as provided in (d)4iv and v below, be determined by the New Jersey Business Allocation Schedule (Form NJ-1040-NR-A), as prepared by the partnership. Failure to provide such schedule may result in allocation of all income to New Jersey.

iv. Partnership income or loss from rental real estate activities and/or net gains or income from the sale or disposition of real property located in New Jersey is sourced to New Jersey.

v. If a partnership's activity is carried on solely outside New Jersey or both inside and outside New Jersey, and the partnership believes that the New Jersey Business Allocation Schedule does not provide an equitable allocation of income, gains, expenses, or losses attributable to sources inside and outside the State, and that the books and records of the partnership will disclose to the Director's satisfaction a more appropriate method of allocation of such items, the partnership may request from the Director an exception from the use of the New Jersey Business Allocation Schedule. Such request shall be made in writing and set forth the basis of the request, the reason(s) why the New Jersey Business Allocation Schedule does not provide an equitable allocation, and the substitute method of allocation requested to be used. Such request shall be mailed to the New Jersey Division of Taxation, Individual Income Tax Audit Branch, PO Box 288, Trenton, NJ 08695-0288. The taxpayer shall not use the substitute method of allocation until such request is approved, in writing, by the Director. Once the Director approves a substitute method of allocation, the taxpayer cannot change it without written approval of the Director. A taxpayer must renew the request for exception from the use of the New Jersey Business Allocation Schedule every three years.

5. The allocation of gain or loss from a complete liquidation is determined as follows:

i. The gain or loss from the sale of real and tangible assets located in New Jersey is sourced to New Jersey.

ii. The gain or loss from the sale of motor vehicle equipment is sourced to the state where the vehicle is registered, unless the vehicle was used predominantly in another state.

iii. The gain or loss from the sale of intangibles is allocated using the average of the business allocation used for the last three years, as defined in (d)4 above.

6. A tiered partnership shall take into account its distributive share of partnership income from any partnership of which it is a member. Once income has been allocated by a partnership, it shall not be reallocated by the partners.

7. Partnership contributions to a qualified pension plan under the Internal Revenue Code made on behalf of employees of the partnership and deductible as business expenses for Federal income tax purposes also are deductible under 18:35-1.1(d), consistent with (d)1 above, in determining the net income of the partnership.

(e) Partners who are taxpayers for gross income tax purposes shall report their partnership income according to the following:

1. Partners who own more than one partnership interest shall determine their distributive share for each partnership interest separately. Once distributive share from each partnership interest has been determined, taxpayers shall net all distributive shares and report the total in the category, distributive share of partnership income under 54A:5-1.k.

2. A partner may deduct unreimbursed expenses incurred in the conduct of the partnership's business if the expenses meet the deductibility standard of an ordinary business expense as described in 18:35-1.1(d).

3. In reporting partnership income, a partner may deduct payments made to a qualified I.R.C. § 401(k) plan to the extent allowable for Federal income tax purposes, as provided in 54A:6-21.

4. A partner's contributions to the partnership's Keogh plan qualified under the Internal Revenue Code are not deductible business expenses under the standard provided in 18:35-1.1(d), consistent with (d)1 above. Such contributions are included in the participating partner's distributive share of partnership income reported for New Jersey gross income tax purposes. Previously taxed contributions to a Keogh Plan are not subject to tax when subsequently withdrawn by the partner.

5. Distributive share of partnership income or loss shall not be combined with other categories of income or loss. See 18:35-1.1(c)6.

6. If the partner and the partnership have different taxable years, the partner shall report his or her distributive share of partnership income for the partnership's taxable year that ended within the partner's taxable year.

7. A partner who is a resident taxpayer for part of any taxable year and a nonresident taxpayer for part of the same taxable year is required to report his or her distributive share of partnership income as follows:

i. The part-year resident return shall include the portion of the partner's distributive share of the partnership income determined by multiplying the partner's entire distributive share of partnership income as determined under (d) above by the percentage which the number of days of the partnership's fiscal year that the partner was a New Jersey resident bears to 365 (366 for a leap year).

ii. The part-year nonresident return shall include the portion of the partner's distributive share of partnership income as follows:

(1) If the distributive share of partnership income was derived entirely from New Jersey sources, the portion of that distributive share of partnership income determined by multiplying the partner's entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that the partner was not a New Jersey resident bears to 365 (366 for a leap year); or

(2) If the distributive share of partnership income was derived partly within New Jersey and partly outside New Jersey, the portion of such distributive share determined by multiplying the partner's entire distributive share of partnership income derived by the partnership from sources within New Jersey (determined as provided in (d)4ii or (d)4iii above), by the percentage which the number of days of the partnership's fiscal year that the percentage was not a New Jersey resident bears to 365 (366 for a leap year).

iii. A partner who is a resident taxpayer for part of the tax year and a nonresident taxpayer for the remainder of the tax year shall attach a schedule to the partner's part year NJ-1040 and the part year NJ-1040-NR showing the calculations used to determine the amounts reported on each return with respect to income or loss of a partnership.

(f) Partnership filing requirements are as follows:

1. Partnerships having a New Jersey resident partner or having any income or loss derived from New Jersey sources shall file the following with the Division:

i. Form NJ-1065; including the statement of income and expenses, balance sheet per books, any and all referenced supporting schedules, and partner directory;

ii. Form NJ-CBT-1065 if the partnership is subject to the tax on nonresident partners;

iii. Schedule NJK-1 for every resident partner, a copy of which shall be provided to the partner;

iv. Schedule NJK-1 for every nonresident partner, a copy of which shall be provided to the partner;

v. Pages 1 through 5 of Federal Form 1065 and any Federal extension request forms filed;

vi. Schedule NJ-NR-A, if required pursuant to (d)4 above; and

vii. Any partnership that requests an extension of time to file must file Form PART-200-T if the partnership is subject to the per partner filing fee or Form CBT-206 to apply for an extension of time to file an NJ-CBT-1065 that has tax due.

2. Information filings shall be made on or before the date of expiration of the permitted filing period for the partnership's Federal Form 1065, including any extensions of such period allowed for Federal income tax purposes.

i. All Form NJ-1065 filers with 10 or more partners or members must file the return electronically, in addition to partnerships subject to the provisions of the corporation business tax that also must file electronically pursuant to the provisions of 18:7-17.1 0.

ii. For any partnership that utilizes the services of a paid tax preparer to prepare its partnership returns, the paid tax preparer shall file the partnership return electronically and payments of the partnership liabilities and fees along with the submission of payment-related returns, such as the Partnership Application for Extension of Time to File Form NJ-1065 (Form Part 200-T) or Partnership Application for Extension of Time to File Form NJ-CBT-1065 (Form CBT-206), shall be made electronically either by the partners or by a paid tax practitioner as instructed by the partners of the partnership.

iii. For partnerships that file the return electronically pursuant to this section and N.J.A.C. 18:7-17.10, payments of partnership liabilities and fees along with the submission of payment-related returns, such as the Partnership Application for Extension of Time to File Form NJ-1065 (Form Part 200-T) shall be made electronically.

3. Partnerships with partners subject to the gross income tax shall make available and submit the following items at the Division's request:

i. A complete Federal Form 1065, including all schedules and supporting attachments; and

ii. Any other documentation or information the Division deems necessary.

(g) Partner filing requirements are as follows:

1. Resident and nonresident partners subject to the gross income tax shall attach to their New Jersey income tax return the following for each partnership:

i. The partner's New Jersey Schedule NJK-1, if received; or

ii. If no Schedule NJK-1 was received, Federal Schedule K-1, along with a schedule showing the calculation of New Jersey distributive share of partnership income.

2. Resident partners shall include with their New Jersey resident tax return a copy of the items specified in (g)1 above for each partnership in which the taxpayer is a partner, regardless of the source of the partnership's income or loss.

3. Nonresident partners shall include with their New Jersey nonresident tax return a copy of the items specified in (g)1 above for each partnership in which the taxpayer is a partner and that has income or loss from New Jersey sources.

(h) The provisions of this section are illustrated by the following examples:

Example 1:

A partnership reported the following income on its Federal Schedule K (Form 1065):

Ordinary income	$ 197,000
Interest income	$ 1,000
Section 1231 gain	$ 2,000

The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 197,000
Interest income	$ 1,000
Section 1231 gain	$ 2,000
Partnership income:	$ 200,000

The partnership has two full year resident partners who are not members of any other partnerships. Partner A has a 60 percent interest and partner B has a 40 percent interest. They will report their distributive shares of partnership income on their NJ-1040s as follows:

	Partner A	Partner B
Distributive share of partnership income:	(60%) $ 120,000	(40%) $ 80,000

Example 2:

A partnership reported the following income on its Federal Schedule K (Form 1065):

Ordinary income	$ 75,000
Section 1231 gain	$ 6,000

The partnership also incurred the following expenses as reported for Federal income tax purposes:

Section 179 expense	$ 15,000
Meal and entertainment expenses (50% disallowed for Federal purposes)	$ 3,000

The partnership in completing its NJ-1065 will determine partnership income as follows:

Income
Ordinary income:	$ 75,000
Section 1231 gain	$ 6,000	$ 81,000
Expenses
Section 179	($ 15,000)
Meal and entertainment	($ 3,000)	($ 18,000)
Partnership income:		$ 63,000

The partnership has two full year resident partners who are not members of any other partnerships. Partner A has a 2/3 interest and partner B has a 1/3 interest. Partner A also has the following unreimbursed business expenses: automobile $ 800.00 and telephone $ 200.00. These ordinary business expenses were incurred in the conduct of the partnership's business and are deductible. The partners will report their distributive shares of partnership income on their NJ-1040s as follows:

	Partner A	Partner B
	(2/3)	(1/3)
Distributive share of partnership income:	$ 42,000	$ 21,000
Unreimbursed business expenses
Auto	($ 800)
Telephone	($ 200)
Distributive share of partnership income:	$ 41,000	$ 21,000

Example 3:

A partnership reported the following income on its Federal Schedule K (Form 1065):
Ordinary income	$ 200,000
Interest income	$ 1,000
Guaranteed payments	$ 30,000*

* Partner A received guaranteed payments of $ 20,000 for special services rendered.

Partner B received no guaranteed payments.

Partner C is retired and received guaranteed payments of $10,000 pursuant to the partnership's pension plan.

The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 200,000
Interest income	$ 1,000
Guaranteed payments	$ 20,000**
Partnership income:	$ 221,000
Guaranteed payments classified as pension income:	$ 10,000

**Guaranteed payments are allocated to partners according to the partnership agreement.

Partners A and B are full year residents who each have a 50 percent interest in the profit and loss of the partnership. Partners A and B will each report 50 percent of the partnership income (excluding guaranteed payments) on their NJ-1040s as follows:

Partner A	Partner B	Retired Partner C
(50%)	(50%)	(0%)
Distributive share of partnership income: (excluding guaranteed payments)	$ 100,500	$ 100,500	0
Guaranteed payments:	$ 20,000	_______	_____
Distributive share of partnership income:	$ 120,500	$ 100,500	0

Retired partner C has no distributive share of partnership income to report on his or her NJ-1040; however, he or she must report pension income in the amount of $ 10,000.

Example 4a:

A partnership makes contributions to a qualified pension plan under the Internal Revenue Code on behalf of its employees for $ 4,500. The partnership may deduct the $ 4,500 as a business expense.

Example 4b:

Partner X elects to contribute $ 3,000 to his or her account in the qualified Keogh plan established by the partnership. Partner Y elects not to make a contribution to the plan. The partnership must include the $ 3,000 contribution made by partner X in his or her distributive share of partnership income in the taxable year the contribution was made. Partner X may not deduct his or her $ 3,000 contribution as an ordinary business expense. When subsequently withdrawn, partner X's previously taxed contribution will not be subject to tax.

Partners X and Y each elect to make a contribution of $ 5,000 to the partnership's 401(k) plan. They may deduct their contributions to the extent allowed under the Internal Revenue Code in determining their distributive share of partnership income.

The partnership reported the following income on its Federal Schedule K (Form 1065):

Ordinary income	$ 98,000 *
Interest income	$ 2,000

* The ordinary income is net of a $ 15,000 contribution made by the partnership to a qualified pension plan on behalf of its employees. The partnership in completing its NJ-1065 will determine partnership

income as follows:
Ordinary income	$ 98,000
Interest income	$ 2,000
Partnership income:	$ 100,000

The partnership has two full year resident partners who are not members of any other partnerships. They each have an equal interest in the sharing of profit or loss. They will report their distributive shares of partnership income on their NJ-1040s as follows:

	Partner X	Partner Y
	(50%)	(50%)
Distributive share of partnership income:	$ 50,000	$ 50,000
401(k) contribution	($ 5,000)	($ 5,000)
Distributive share of partnership income:	$ 45,000	$ 45,000

401(k) contributions made by the partners are deductible to the extent allowed under the Internal Revenue Code. Keogh plan contributions made by the partners are not deductible.

Example 5a:

A partnership that is in the business of manufacturing consumer products reported the following on its Federal Schedule K (Form 1065):

Ordinary income	$ 200,000
Investment interest expense	($ 10,000)
179 expense	($ 8,000)

The investment interest expense resulted from a loan to finance improvement of machinery and equipment used in the business and meets the ordinary business expense standard.

The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 200,000
Investment interest expense	($ 10,000)
179 expense	($ 8,000)
Partnership income:	$ 182,000

The partnership has two full year resident partners. Partner A and Partner B have equal shares. The partners will report their distributive share of partnership income on their NJ-1040s as follows:

	Partner A	Partner B
	(50%)	(50%)
Distributive share of partnership income:	$ 91,000	$ 91,000

Example 5b:

A law firm partnership earned $ 600,000 of ordinary income during the calendar year. Partner A is financing 50 percent of his or her capital contribution to the partnership with a loan from the partnership. The interest on this loan is $ 4,000. Partner B's capital contribution came entirely from his or her own funds. The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 600,000
Interest income	$ 4,000
Partnership income:	$ 604,000

Partner A can deduct the $ 4,000 interest expense since the interest resulted from a loan used to buy equity in the partnership and will report $ 298,000 as distributive share of partnership income. Partner B will report $ 302,000 as distributive share of partnership income on the NJ-1040.

Example 5c:

A rental real estate partnership reported the following on its Federal Schedule K (Form 1065):

Rental income	$ 21,000
Interest income	$ 3,000
Investment interest expense	($ 20,000)

The investment interest expense of $ 20,000 resulted from the partnership financing a $ 300,000 distribution to the partners with a bank loan that required the partnership to pledge one of its buildings as collateral.

The partnership in completing its NJ-1065 will determine partnership income as follows:

Rental income	$ 21,000
Interest income	$ 3,000
Investment interest expense	$0
Partnership income:	$ 24,000

The investment interest expense cannot be deducted for New Jersey gross income tax purposes since the transaction does not meet the ordinary business expense standard. Investment interest expense that flows out of the partnership to a partner may never be deducted by the individual partner as an ordinary business expense for New Jersey gross income tax purposes.

The partnership has two full year resident partners. Partner A has a 2/3 interest and Partner B has a 1/3 interest. The partners will report their distributive shares of partnership income on their NJ-1040s as follows:

	Partner A	Partner B
	(2/3)	(1/3)
Distributive share of partnership income:	$ 16,000	$ 8,000

Example 6:

An individual taxpayer was a partner in three partnerships. His or her distributive share of partnership income or loss from each of the partnerships was as follows:

Partnership K	$ 20,000
Partnership L	($ 8,000)
Partnership M	$ 4,000
Total	$ 16,000

The taxpayer must net all his or her distributive shares of partnership income and report the total in the category distributive share of partnership income.

In addition to being a partner in these partnerships, the taxpayer was also a shareholder in an S corporation and a proprietor of a small business. His or her other business activities resulted in the following:

Pro rata share of S corporation income	$ 3,000
Net profits from business	($ 2,000)

The taxpayer cannot combine his or her net pro rata share of S corporation income of $ 3,000 with his or her gain from her total distributive share of partnership income of $ 16,000 or his or her loss from her sole proprietorship of $ 2,000. Each category of income must be reported separately.

The taxpayer will report the following income on his or her NJ-1040:

Distributive share of partnership income	$ 16,000
Net pro rata share of S corporation income	$ 3,000
Net profits from business	$0

The taxpayer must report a zero in category net profits from business on his or her NJ-1040. Under the Gross Income Tax Act, a taxpayer may not offset losses in one category of income against income or gain in another category.

Example 7:

Partnership DEF is a partner in Partnership XYZ. As a partner, Partnership DEF received a schedule NJK-1 from Partnership XYZ that reported the following income:

	Total Distribution	NJ Source Amounts
Distributive share of partnership income:	$ 12,000	$ 6,000

In addition to its income from XYZ, Partnership DEF generated the following income during the calendar year:

Ordinary income	$ 46,000
Interest income	$ 4,000

Partnership DEF completed the New Jersey Business Allocation Schedule (Form NJ-NR-A) and determined its percentage of partnership income allocated to New Jersey to be 10 percent. In determining its income allocation percentage, Partnership DEF includes neither the distributive share of partnership income nor the allocation factors of Partnership XYZ.

Partnership DEF will report its distributive share of partnership income as follows:

	Total Distribution	NJ Source Amounts
Ordinary income	$ 46,000
Interest income	$ 4,000
Distributive share of partnership	$ 50,000
income:
Business Allocation Percentage =		$ 5,000
10%
Distributive share of XYZ	$ 12,000	$ 6,000
partnership income (Per schedule
NJK-1 from Partnership XYZ)
Distributive share of partnership income:	$ 62,000	$ 11,000

Partnership DEF cannot reallocate the income it received from Partnership XYZ.

Partnership DEF has two partners who share equally in profits and losses. Partner L is a full year resident of New Jersey and Partner M is a full year resident of Pennsylvania. Partnership DEF will report the following distributive share of partnership income on each of its partner's schedules NJK-1:

	Total Distribution	NJ Source Amounts
Distributive share of partnership income:	$ 31,000	$ 5,500

The partners will report their distributive share of partnership income on their individual returns as follows:

	Partner L	Partner M
	(50%)	(50%)
NJ-1040	$ 31,000
NJ-1040NR	Everywhere	NJ Source
	$ 31,000	$ 5,500

As a resident, Partner L is subject to tax on his or her entire distributive share of partnership income, regardless of where it is sourced. Partner M, as a nonresident, is only subject to tax on his or her distributive share of partnership income that is sourced to New Jersey.

Example 8a:

A partner's taxable year ends on December 31, while the partnership's fiscal year ends on June 30. The partner is to report the partner's distributive share of partnership income from the partnership's taxable year that ended June 30 on the partner's NJ-1040.

Example 8b:

A partner's taxable year ends on December 31, while the partnership's fiscal year ended on August 31. The partnership changed to a calendar year partnership during the year. In addition to the partnership filing a fiscal year return covering the period from September 1 of the prior year to August 31 of the current year, the partnership must also file a short year return covering the period from September 1 of the current year to December 31 of the current year.

The partnership reported the following distributive share of partnership income on the partner's schedules NJK-1:

NJK-1 (September 1 of the prior year-August 31 of the current year) $ 100,000

NJK-1 (September 1 of the current year-December of the current year) $ 30,000

The partner, who is not a member of any other partnership and who is a full year resident of New Jersey, is to report $ 130,000 as distributive share of partnership income on taxpayer's NJ-1040. The partner has to report the total from both NJK-1s on his or her NJ-1040 since the prior and current taxable years of the partnership ended within the partner's taxable year.

Example 9:

Partnership ABC carried on business both within and outside of New Jersey. By completing the New Jersey Business Allocation Schedule (Form NJ-1040-NR-A), Partnership ABC determined that 60 percent of its partnership income is sourced to New Jersey.

Partnership ABC reported the following income on its Federal Schedule K (Form 1065):

Ordinary income	$ 63,000
Dividend income	$ 1,000
Net long-term capital loss	($ 4,000)

The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 63,000
Dividend income	$ 1,000
Net long-term capital loss	($ 4,000)
Partnership income:	$ 60,000

Partnership ABC has partnership income from all sources of $ 60,000 and partnership income from New Jersey sources of $ 36,000 ($ 60,000 x 60%).

Partnership ABC has three partners who share equally in profits and losses. They are not members of any other partnerships. Partners A and B are each full year resident partners and Partner C is a full year resident of New York. Partnership ABC will report the following distributive shares of partnership income on its partner's schedules NJK-1.

	Total Distribution	NJ Source Amounts
Distributive share of partnership income:	$ 20,000	$ 12,000

The partners will report their distributive share of partnership income on their individual returns as follows:

	Partner A	Partner B	Partner C
	(1/3)	(1/3)	(1/3)
NJ-1040	$ 20,000
NJ-1040		$ 20,000
NJ-1040NR			Everywhere $ 20,000
		NJ Source $ 12,000

Partners A and B, as residents, are subject to tax on their entire distributive shares of partnership income, regardless of where it is sourced. Partner C, as a nonresident, is only subject to tax on his or her distributive share of partnership income that is sourced to New Jersey.

Example 10a:

Partnership ABC is a calendar year partnership that reported a distributive share of partnership income to Partner A of $ 12,000. Partnership ABC's income is all sourced to New Jersey.

Partner A was a resident of New Jersey through September 30 and became a nonresident of New Jersey on October 1.

Partner A is required to file a part-year New Jersey resident return for the period from January 1 through September 30 and a part-year New Jersey nonresident return for the remaining three months of the calendar year.

Partner A will report a distributive share of ABC's partnership income in the amount of $ 8,975 on his or her part-year New Jersey resident return.

$ 12,000 x (273/365) = $ 8,975

Partner A will report a distributive share of ABC's partnership income in the amount of $3,025 on his or her part-year New Jersey nonresident return.

$ 12,000 x (92/365) = $ 3,025

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 10b:

Partnership ABC is a fiscal year partnership that has a year end of November 30. Partnership ABC reported a distributive share of partnership income to Partner A of $ 12,000. Partnership ABC's income is all sourced to New Jersey.

Partner A was a resident of New Jersey through September 30 and became a nonresident of New Jersey on October 1.

Partner A will report a distributive share of ABC's partnership income in the amount of $ 9,995 on his or her part-year New Jersey resident return. Partner A must multiply his or her entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that Partner A was a New Jersey resident bears to 365. Partnership ABC's fiscal year began on December 1 of the prior year and Partner A was a resident of New Jersey from December 1 of the prior year through September 30 of the current year.

$ 12,000 x (304/365) = $ 9,995

Partner A will report a distributive share of ABC's partnership income in the amount of $ 2,005 on his or her part-year New Jersey nonresident return. Partner A must multiply his or her entire distributive share of partnership income (all sourced to New Jersey) by the percentage which the number of days of the partnership's fiscal year that he or she was not a New Jersey resident bears to 365. Partner A was not a resident of New Jersey as of October 1 and Partnership's ABC fiscal year ended on November 30.

$ 12,000 x (61/365) = $ 9,995

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 10c:

Partner A was a resident of New Jersey through September 30 and became a nonresident on October 1.

$ 12,000 x (304/365) = $ 9,995

Partner A will report a distributive share of partnership income from everywhere of $ 2,005 and from New Jersey sources of $ 401.00 on his or her part-year nonresident New Jersey return. Partner A must multiply his or her entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that partner A was a nonresident of New Jersey bears to 365.

Partner A was nonresident of New Jersey as of October 1 and partnership ABC's fiscal year ended on November 30. Partner A must then multiply his or her distributive share of partnership income for the nonresident period, $ 2,005, by the ABC's New Jersey allocation percentage, 20 percent, to determine the amount of income sourced to New Jersey for his or her period of nonresidency.

$ 12,000 x (61/365) = $ 2,005 partnership income from everywhere, Column A

$ 2,005 x 20% = $ 401.00 partnership income sourced to New Jersey, Column B

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 11:

A partnership has two partners, X and Y, that share profit and loss equally. Partner X is a resident partner and Partner Y is a nonresident partner. On December 31, Partners X and Y completely liquidate the partnership. The partnership had current year ordinary income of $ 3,800, interest income of $ 160.00, dividend income of $ 40.00, and a gain from the sale of partnership assets, as a result of the complete liquidation, of $ 15,000.

The partnership in completing its NJ-1065 will determine its distributive share of partnership income as follows:

Ordinary income	$ 3,800
Interest income	$ 160
Dividend income	$ 40
Partnership income	$ 4,000

By completing the New Jersey Business Allocation Schedule (Form NJ-1040-NR-A), the partnership determined that 75 percent of its partnership income is sourced to New Jersey. Therefore, $ 3,000 of partnership income is sourced to New Jersey.

The partnership, as a result of the complete liquidation, sold all of its assets, which included two parcels of real property. The parcel in New Jersey sold at a gain of $ 7,000 and the parcel in Pennsylvania sold at a gain of $ 4,000. Additionally, the partnership sold equipment and other tangible assets at a gain of $ 3,000 of which $ 1,800 was sourced to New Jersey. Finally, the partnership sold its intangible assets at a gain of $ 1,000. The average of the partnership's last three years business allocations is 80 percent; therefore, $ 800.00 of the gain from the sale of intangible assets is sourced to New Jersey.

The partnership in completing its NJ-1065 will determine its gain from a complete liquidation as follows:

	Everywhere	New Jersey
Gain from real property	$ 11,000	$ 7,000
Gain from tangible assets	$ 3,000	$ 1,800
Gain from intangible assets	$ 1,000	$ 800
Gain from complete liquidation	$ 15,000	$ 9,600

The partnership will report on its NJ-1065 its distributive share of partnership income of $ 4,000, of which $ 3,000 is sourced to New Jersey, and a gain from its complete liquidation of $ 15,000 of which $ 9,600 is sourced to New Jersey. The partnership will pro-rate the income accordingly and report each partner's share on their respective Schedule NJK-1s as follows:

	Everywhere	New Jersey
Distributive share of partnership income	$ 2,000	$ 1,500
Gain/loss from complete liquidation	$ 7,500	$ 4,800

Additionally, Partner X had a gain of $ 5,000 on the disposition of his or her partnership interest and Partner Y had a loss of $ 2,000 on the disposition of his or her partnership interest.

The partners will report the following on their individual returns:

Partner X
NJ-1040
Net gains or income from disposition of
property:
Gain/loss from complete liquidation	$ 7,500
Gain/loss sale of partnership interest	$ 5,000	$ 12,500
Distributive share of partnership income		$ 2,000

Partner Y
NJ-1040NR	Everywhere	New Jersey
Net gains or income from
disposition of property:
Gain/loss from complete	$ 7,500	$ 4,800
liquidation
Gain/loss sale of partnership	($ 2,000)	$ 0	$ 5,500	$ 4,800
interest
Distributive share of			$ 2,000	$ 1,500
partnership income

Since the partnership had a complete liquidation, Partner X will report $ 2,000 in the distributive share of partnership income category and $ 12,500 in the net gains from disposition of property category.

Partner Y will report $ 2,000 in the distributive share of partnership income category and $ 5,500 in the net gains from disposition of property category in the everywhere column and $ 1,500 in the distributive share of partnership income category and $ 4,800 in the net gains from disposition of property category in the New Jersey source column. The gain or loss from the sale of a partnership interest is from an intangible not employed in a trade or business, therefore, not subject to tax for a nonresident.

Example 12:

Partners A and B who are both residents of New Jersey share profit and loss equally. On August 31, Partners A and B sold their rental building located in New Jersey at a gain of $ 16,000. The partnership continued operating their other business activity, which generated ordinary income of $ 20,000.

The partnership in completing its NJ-1065 will determine partnership income as follows:

Ordinary income	$ 20,000
Gain from disposition	$ 16,000
Partnership income	$ 36,000

Since the partnership did not have a complete liquidation, the partnership will include the gain from the sale of its rental property in partnership income.

The partners will report the following on their individual tax returns:

	Partner A	Partner B
	(1/2)	(1/2)
NJ-1040 Partnership income	$ 18,000	$ 18,000

N.J. Admin. Code § 18:35-1.3

Amended by 48 N.J.R. 295(a), effective 2/16/2016

Amended by 56 N.J.R. 1745(a),effective 8/19/2024