New Jersey ~ Corporate, Personal Income Taxes: Failure of a Shareholder Trust to Make New Jersey ESBT Election Did Not Remove S Corporation Status

first_imgCCH Tax Day ReportIn a letter ruling the New Jersey Division of Taxation, Regulatory Services Branch, stated that under the New Jersey gross (personal) income tax an S corporation could have a shareholder that was a trust that did not elect to become a New Jersey Electing Small Business Trust (ESBT) and still not lose its New Jersey S corporation status. The taxpayer would still have to properly file Form CBT-2553, New Jersey S Corporation or New Jersey QSSS Election. Further, the trust would need to file Form NJ-1041, Fiduciary Return, and compute its tax in the same manner as a regular (non-ESBT) trust. The taxpayer was an S corporation for federal income tax purposes. One of its shareholders was a trust that historically had been a grantor trust. However, the trust lost its grantor trust status and then elected to be taxed as an ESBT for federal tax purposes. If the trust had not made the federal ESBT election, the taxpayer would have lost its status as an S corporation for federal income tax purposes because it would have had an ineligible shareholder. A trust can only become an ESBT for New Jersey tax purposes if it affirmatively files a New Jersey ESBT election. In New Jersey, the election to be treated as an ESBT is not a mandatory election. Thus, a federal ESBT is permitted to file Form NJ-1041, Fiduciary Return, when the New Jersey ESBT election has not been made. Further, if the trust did not elect to be a New Jersey ESBT and file Form NJ-1041SB, Fiduciary Return Electing Small Business Trust, the New Jersey S corporation’s status would not be affected by the shareholder’s type of trust.LR: 2016-1-GIT, New Jersey Division of Taxation, September 28, 2016, ¶401-994last_img

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