NJSA 54:10A-3: Who is a Corporation for NJ Tax?
Learn how NJ's statutory definition of a "corporation" for tax purposes can include entities beyond traditional corporations based on federal tax elections.
The New Jersey Corporation Business Tax (CBT) is a franchise tax levied on corporations for the privilege of operating within the state. Its application is governed by the Corporation Business Tax Act, which establishes the rules for which entities are subject to the tax and how it is calculated. The foundation of this tax system is rooted in state statutes that define a “corporation” for these purposes. Understanding this statutory definition is the first step for any business in determining its obligations.
Defining a Corporation for Tax Purposes
New Jersey law provides a broad definition of a “corporation” for the purposes of the Corporation Business Tax. This definition is wider than the common understanding of a corporation as a legal entity formed by filing articles of incorporation. The classification under tax law is a matter of substance over form, meaning an entity’s characteristics and federal tax treatment determine its status in New Jersey.
Under the governing statute, the term “corporation” includes entities such as joint-stock companies or associations and business trusts. These are forms of unincorporated business enterprises that possess corporate attributes, like centralized management and transferable ownership interests. For instance, a business conducted by trustees where ownership is evidenced by a certificate or similar written instrument falls within this definition.
A primary element of New Jersey’s definition is its direct link to federal tax law. The statute specifies that any entity classified as a corporation for federal income tax purposes is also considered a corporation for New Jersey CBT purposes. If an entity, regardless of its underlying legal structure, has elected to be taxed as a corporation by the Internal Revenue Service (IRS), it will be subject to the CBT. The definition also includes state or federally chartered building and loan associations and savings and loan associations.
This classification is strictly for New Jersey tax purposes and does not alter an entity’s legal status for matters of liability or governance. A business might be an LLC under state law, but if it elects to be taxed as a corporation federally, it will be treated as such for the CBT. An entity’s formation documents alone do not determine its New Jersey tax obligations, as the focus is on the federal tax election.
Key Statutory Definitions
Other terms in the Corporation Business Tax Act are also important. The term “taxpayer” is defined to include any corporation required to pay taxes under the act, and this definition also extends to combined groups in the case of mandatory or elective combined reporting, and certain partnerships. The Corporation Business Tax is based on a corporation’s entire net income. “Entire net income” is the primary base for the CBT and is defined as total net income from all sources, which is then subject to various adjustments. This figure is generally presumed to be the same as the corporation’s federal taxable income before certain federal deductions, and the portion taxable in New Jersey is determined by an allocation factor.
Application to Different Business Entities
The state’s tax definition directly impacts common business structures. An LLC’s New Jersey tax status, for instance, hinges on its federal election. If an LLC elects to be taxed as a C Corporation with the IRS by filing Form 8832, it is treated as a corporation for New Jersey CBT purposes and must file the appropriate corporate tax return.
If an LLC elects to be taxed as an S Corporation by filing Form 2553, it becomes subject to New Jersey’s specific rules for S Corporations. While defined as corporations, their income is treated differently than a standard C Corporation’s. Income not subject to federal corporate tax generally passes through to shareholders and is not taxed at the entity level in New Jersey. However, the state does impose a tax on an S Corporation’s income that is subject to federal tax.
A partnership is generally not subject to the CBT. However, if a business structured as a limited partnership association falls under the statutory definition of a “corporation,” it would be subject to the tax. Therefore, a business’s legal structure and federal tax status determine its responsibilities.
Determining Taxable Nexus
If an entity meets the definition of a “corporation,” it must then determine if it has a sufficient connection, or “nexus,” with New Jersey to be subject to the CBT. Nexus means a corporation’s activities or presence in the state are substantial enough to justify taxation. Without this connection, the state is constitutionally prohibited from taxing the entity.
A primary way to establish nexus is by having a physical presence. This includes maintaining an office or warehouse, employing personnel who conduct activities in the state, or owning or leasing property in New Jersey.
New Jersey also has an economic nexus standard, meaning a corporation can be subject to the CBT without a physical footprint. A corporation has substantial nexus if it derives receipts from sources within the state over $100,000. It also has nexus if it has 200 or more separate transactions delivered to customers in New Jersey during its fiscal year.
A corporation must carefully analyze its connections to New Jersey to ensure compliance. The privilege of doing business, employing capital, or deriving income within the state are all activities that can subject a corporation to the CBT.