N.J. Admin. Code § 18:7-20.2

Current through Register Vol. 56, No. 24, December 18, 2024

Section 18:7-20.2 - Qualified Subchapter S Subsidiaries (QSSS)

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

1. "Qualified Subchapter S Subsidiary" (QSSS) means and includes a domestic corporation that is a wholly owned subsidiary of a Federal S corporation and for which a valid election has been made by the parent S corporation to be treated as a QSSS for Federal income tax purposes.

2. "New Jersey Qualified Subchapter S Subsidiary" (NJ-QSSS) means and includes a Federally qualified QSSS, wholly owned by a New Jersey S corporation, and for which the parent and the New Jersey S corporation make a valid NJ-QSSS election as set forth in these regulations.

(b) A Federal S corporation is permitted to own a Qualified Subchapter S Subsidiary (QSSS) and effectively to treat the subsidiary as if it were a division. The assets, liabilities, and items of income, deduction, and credit flow through to the parent retaining the same character as do the respective allocation factor attributes of the QSSS which flow through to the parent's property, receipts and payroll factors.

(c) A New Jersey S corporation seeking recognition as a New Jersey Qualified Subchapter S Subsidiary (NJ-QSSS), must meet the following requirements:

1. An S corporation parent of a QSSS must register as a New Jersey S corporation, or make a valid election and consent to jurisdiction pursuant to N.J.S.A. 54:10A-5.22, N.J.S.A. 54:10A-5.23 and these rules;

2. The parent shareholder must consent to New Jersey taxation of its QSSS's income allocation by filing a Form CBT-100S that includes the assets, liabilities, income, and expenses of the QSSS. The property, receipts, and payroll of the QSSS must be included in the parent's allocation factor. Failure of the parent either to consent or to file a Form CBT-100S for any period will result in the denial of NJ-QSSS status, and the subsidiary will be subjected to taxation in New Jersey as a C corporation;

3. The New Jersey S corporation electing to be recognized as a QSSS must file a completed and properly executed Form CBT-2553 by which its parent New Jersey S corporation consents to taxation of the QSSS's income and calculation of allocation fractions and factor by New Jersey. Form CBT-2553 must be executed by a qualified corporate officer of the New Jersey S corporation and by an authorized officer of the parent New Jersey S corporation. Form CBT-2553 must be filed before the 16th day of the fourth month of the first tax year that the NJ-QSSS election is to take effect; and

4. Any Federal S corporation that is treated Federally as a QSSS may be recognized in New Jersey as a NJ-QSSS provided that the conditions of this subsection have been met.

(d) Regardless of any provision in this section, every qualified NJ-QSSS must file a Form CBT-100S and pay the applicable minimum tax. Unless the NJ-QSSS formally dissolves by making the requisite filing through the Division of Revenue and Enterprise Services, it is required to file annually a corporation business tax return, remit the required tax, and make an annual report to the New Jersey Division of Revenue and Enterprise Services. A failure to file a New Jersey Form CBT-2553 containing the corporate parent's consent to taxation by New Jersey will result in the denial of New Jersey QSSS status and will subject the entity to taxation in New Jersey as a C corporation.

(e) A Federal QSSS that elects to be treated as a NJ-QSSS for New Jersey tax purposes and that has previously filed the necessary election form (Form CBT-2553) may request to have the estimated corporation business tax payments transferred to its parent corporation's account for the year in which the New Jersey QSSS election was made. The NJ-QSSS must submit a written request, signed by an officer of the NJ-QSSS, together with a copy of the New Jersey S corporation election form (Form CBT-2553) to the New Jersey Division of Taxation. The Division of Taxation will transfer to the parent all of the NJ-QSSS's estimated payments except for a designated amount that will be used to satisfy the NJ-QSSS's current year minimum tax liability and the 50 percent estimated tax payment for the subsequent year.

(f) The following examples are provided for illustration. Example 1:

Taxpayer is an S corporation for Federal and New Jersey purposes, is headquartered in Illinois, and has branches in

New Jersey and other states. It recently set up a North Carolina QSSS, which made the appropriate election to be treated as a disregarded entity for Federal purposes. Other than being a subsidiary of the parent, the QSSS has no operations in New Jersey.

The taxpayer intends to include income of the North Carolina QSSS in its allocation factor in order to allocate the parent's income among the various states in which it does business, including New Jersey. This treatment is permitted in New Jersey provided that the North Carolina QSSS registers with New Jersey or has filed a Form CBT-2553-Cert, files a separate Form CBT-100S, and pays the minimum tax. If the foreign QSSS does not register or file a completed Form CBT-2553-Cert, the income does not flow up to the parent's return.

Example 2:

A holding company was set up in November with a calendar year end. An S election for Federal and New Jersey purposes was made for the new holding company effective from its inception. After the new company was set up, it acquired all the shares of two existing Federal S corporations having a calendar-year accounting period, from the same owner. Federal and New Jersey QSSS elections are made effective in November. One of the acquired corporations is a New Jersey S corporation, the other is a New Jersey C corporation.

The new holding company can make a timely New Jersey S corporation election since it was set up in November. The two acquired corporations, which change shareholders during their accounting year, cannot make New Jersey elections because their taxable years began in January. For the acquired corporations, the time limit to make valid New Jersey S corporation elections had already passed for that year.

N.J. Admin. Code § 18:7-20.2

Amended by 49 N.J.R. 1694(a), effective 6/19/2017