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Income From S Corporations

Understanding Income Tax

Historic Red Mill in Town of Clinton.

New Jersey Treatment of Federal S Corporation Income ................................................................................. 3

Shareholder Reporting Requirements ................................................................................................................ 3
Payment of Tax by Nonresident Shareholders .................................................................................................. 5

Question S-1. What do I do with the information on the Schedule NJ-K-1, Form CBT-100S that my S
corporation gave me? ........................................................................................................................................... 5

Resident Shareholders ............................................................................................................................................................................. 6

Nonresident Shareholders ...................................................................................................................................................................... 6

Question S-2. What do I report if my non-electing federal S corporation did not give me a Schedule NJ-
K-1, Form CBT-100S? ............................................................................................................................................ 7

S Corporations With No Income From New Jersey Sources ...................................................................................................... 8

S Corporations With Income From New Jersey Sources ............................................................................................................. 8

Instructions For Shareholder’s Reconciliation Worksheet B........................................................................... 10

Question S-3. How do I determine my reportable income from an S corporation if I was a part-year
resident/part-year nonresident? ........................................................................................................................ 14

Part-Year Resident Return ................................................................................................................................................................... 14

Part-Year Nonresident Return ............................................................................................................................................................ 16

Question S-4. As a shareholder in multiple S corporations, how can I use S corporation losses on my
New Jersey Income Tax return? ......................................................................................................................... 18

Question S-5. As a New Jersey resident shareholder of an S corporation, am I entitled to a credit for the
taxes I paid to another jurisdiction with respect to my S corporation income? .......................................... 28

Income Not Eligible for a Credit ........................................................................................................................................................ 28

Question S-6. How do I calculate my New Jersey Accumulated Adjustments Account (AAA)? ................. 29

Instructions For Completing Worksheet C ....................................................................................................... 30

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  Income From S Corporations 

   Understanding Income Tax 

 Question S-7. How do I calculate the balance of my New Jersey Earnings and Profits (E&P) Account? ... 31 

 Instructions For Completing Worksheet D ....................................................................................................... 33 

 Instructions For Completing Worksheet E ........................................................................................................ 34 

 Question S-8. How do I determine my New Jersey basis? .............................................................................. 35 

 Question S-9. How do I report my distributions? ............................................................................................ 37 

 Question S-10. How do I determine and report my gain or loss from the disposition of my S corporation 
 stock? .................................................................................................................................................................... 44 

 Question S-11. What do I report in the year my federal S corporation and my stock were completely 
 liquidated? ........................................................................................................................................................... 49 

 Instructions For Shareholder’s Reconciliation Worksheet B – Liquidated .................................................... 51 

 Connect With Us. ................................................................................................................................................. 52 

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Income From S Corporations

Understanding Income Tax

How New Jersey Treats Federal S Corporation Income

S corporations pass corporate income, losses, deductions, and credits through to their shareholders for federal
tax purposes, as defined by the Internal Revenue Service. “Shareholders of S corporations report the flow-through
of income and losses on their personal tax returns and are assessed tax at their individual income tax rates,” the
IRS says. “This allows S corporations to avoid double taxation on the corporate income” because their
shareholders are taxed rather than the corporate entity.

If you are an S corporation shareholder, you are subject to Income Tax on the portion of S corporation income
attributed to you (referred to as your pro rata – or proportional share – of an S corporation’s income). You are
subject to tax whether or not you actually received a distribution of that income.

S corporation income is reported as one category of income on the shareholder’s New Jersey Income Tax return
rather than in respective categories. For example, interest, dividends, rents, gains, or losses earned by an S
corporation are combined with federal ordinary income (loss) to determine New Jersey S Corporation income
(loss). You would report the net income (loss) as pro rata share of S corporation Income/Loss on your New Jersey
Income Tax return.

Reconciliation Worksheet B takes the information from your Schedule K-1, federal Form 1120S, and converts it
into your pro rata share of S corporation income. There are significant differences between the federal income
tax treatment and the New Jersey Income Tax treatment of federal S corporations. Because of this, you must
complete Reconciliation Worksheet B every year. You also must complete Worksheets C and E for each non-
electing S corporation (see definition below) in which you are a shareholder, whether you are a resident or a
nonresident.

Shareholder Reporting Requirements

New Jersey Electing S Corporation
A federal S corporation must elect to be treated as an S corporation for New Jersey purposes to be a New Jersey
electing S corporation.

Resident shareholders must report on their Income Tax return (Form NJ-1040 or Form NJ-1041) their pro rata
share of the S corporation’s income, regardless of where the income is allocated.

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                            Income From S Corporations 

                                  Understanding Income Tax 

 Nonresident shareholders must report on their Income Tax return (Form NJ-1040NR, Form NJ-1041, or Form 
 NJ-1080C) their share of the S corporation’s income that is allocated to New Jersey.  

 Non-electing Federal S Corporation 
 A federal S corporation that does not elect to be treated as an S corporation for New Jersey purposes is a non-
 electing federal S corporation.  

 Resident shareholders must report on their Income Tax return (Form NJ-1040 or Form NJ-1041) only their pro 
 rata share of the S corporation’s income that is not allocated to New Jersey.  

 Nonresident shareholders are not subject to tax on any portion of the non-electing federal S corporation’s 
 income, even if the income is allocated to New Jersey. However, they must include the income or loss allocated 
 outside New Jersey in Column A, Form NJ-1040NR, or on Form NJ-1041, in the same manner as if they were a 
 resident. 

 New Jersey Hybrid Corporation 
 A New Jersey hybrid corporation is a federal S corporation that has not elected to be treated as an S corporation 
 for New Jersey purposes and conducts business both within and outside New Jersey.  

 For Corporation Business Tax purposes,  the corporation files as a C corporation on Form CBT-100 and 
 calculates its New Jersey allocation factor to determine its net income or loss allocated to New Jersey. 

 For Income Tax purposes, the portion of the income or loss allocated  toNew Jersey is considered C corporation 
 income or loss, and is not reportable by the shareholder. The portion of the income or loss allocated outside  
 New Jersey is considered S corporation income. A resident shareholder must report this as net pro rata share of 
 S  corporation  income.  A nonresident  shareholder  is  not  obligated  to  pay  tax  on  any  portion  of  a  hybrid 
 corporation’s income. However, you must include the income or loss allocated outside New Jersey in Column A, 
 Form NJ-1040NR, or on Form NJ-1041, in the same manner as if you were a resident. 

 SeeCalculating NJ AAA,Calculating NJ E&P    , andReporting Distributions for additional information. 

 Electing Small Business Trust (ESBT) 
 A federal Electing Small Business Trust elects to be taxed as a New Jersey Electing Small Business Trust by filing 
 Form NJ-1041SB and signing the election statement at the bottom of the return. (See Form NJ-1041SB for filing 
 qualifications and requirements.) 
                             
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Income From S Corporations

Understanding Income Tax

Payment of Tax by Nonresident Shareholders

Consenting Shareholders
An S corporation is not required to withhold Income Tax from a consenting nonresident shareholder’s pro rata
share of S corporation income. If you are a consenting nonresident shareholder, you should consider making
estimated Income Tax payments to cover your tax liability from your taxable S corporation income. If you do not
make estimated payments, you may be charged interest on underpayments.

For more information regarding your estimated tax responsibilities and interest on underpayments, see
Estimating Income Taxes.

Nonconsenting Shareholders
The S corporation is required to withhold Income Tax from your pro rata share of S corporation income if:

• You are a nonresident of New Jersey; and

• You become a shareholder in a New Jersey electing S corporation; and

• You failed to consent to that election.

Payments made by the S corporation on your behalf are reported to you on Schedule NJ-K-1, Form CBT-100S,
and must be included as New Jersey estimated tax payments on Form NJ-1040NR, or New Jersey Income Tax
previously paid on Form NJ-1041. To receive credit, you must enclose a copy of your Schedule NJ-K-1(s) with
your Income Tax return if you file a paper return.

Composite Returns for Nonresidents
New Jersey electing S corporations can file a composite return on behalf of qualified nonresident individual
shareholders. (See Form NJ-1080C for filing qualifications and requirements.)

Question S-1. What do I do with the information on the Schedule

NJ-K-1, Form CBT-100S that my S corporation gave me?

If you are a shareholder in a New Jersey electing S corporation, the S corporation will provide you with a
Schedule NJ-K-1, Form CBT‑100S. This schedule contains the income information that you need to prepare your
New Jersey Income Tax return.
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                         Income From S Corporations 

                               Understanding Income Tax 

 If you are a shareholder in two or more S corporations, one or more of which has a loss for the tax year, see 
 question S-4 for rules regarding the priority and reporting of losses. 

 Resident Shareholders 
 The amount reported on Schedule NJ-K-1, Form CBT-100S as “Pro rata share of S corporation Income/Loss” 
 represents your share of the taxable income/loss from that entity. To report your income from the S corporation, 
 you must: 

  1. Enter the “Pro rata share of S corporation Income/Loss” on Schedule NJ-BUS-1 of Form NJ-1040, or Form 
     NJ-1041, in the “Net Pro Rata Share of S corporation Income” section; and 

  2. Enter the amount from Schedule NJ-BUS-1 on Form NJ-1040 or Form NJ-1041 on the line for “Net pro 
     rata share of S corporation Income.” If zero or less, make no entry on Form NJ-1040, or enter zero on 
     Form NJ-1041. 

 The amount reported on Schedule NJ-K-1 as “Total Gain (Loss) from disposition of assets” represents the total 
 amount of taxable gain (loss) from that entity. Enter this amount on Form NJ-1040, or Form NJ-1041, as “Net 
 gains or income from disposition of property.” 

 Nonresident Shareholders 
 The amount reported on Schedule NJ-K-1, Form CBT-100S as “Pro rata share of S corporation Income/Loss” 
 represents your share of the S corporation’s income/loss from both inside and outside New Jersey. You must use 
 this amount to determine your income from all sources as if you were a New Jersey resident.  

 The amount you will actually be taxed on is the amount reported on your NJ-K-1 as “S Income/Loss allocated to 
 NJ.” To report your income from the S corporation, you must: 

  1. Enter the “Pro rata share of S corporation Income/Loss” on Schedule NJ-BUS-1 of     Form NJ-1040NR or 
     Form NJ-1041 in the “Net Pro Rata Share of S corporation Income” section; 

  2. Enter the amount from Schedule NJ-BUS-1 in Column A, Form NJ-1040NR, or on Form NJ-1041, on the 
     line for “Net pro rata share of S corporation Income.” If zero or less, enter zero; 

  3. Enter the “S Income/Loss allocated to NJ” in Column B, Form NJ-1040NR, or on Schedule E, Form NJ-
     1041, on the line for “Net pro rata share of S corporation income.” If zero or less, enter zero. 

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Income From S Corporations

Understanding Income Tax

The amount reported on Schedule NJ-K-1 as “Total Gain (Loss) from disposition of assets” represents your share
of the S corporation’s gain (loss) from both inside and outside New Jersey. You must use this amount to
determine your income from all sources as if you were a New Jersey resident. Enter this amount in Column A,
Form NJ-1040NR, or on Form NJ-1041, as “Net gains or income from disposition of property.” Enter the amount
reported as “Gain (Loss) on disposition of assets allocated to NJ” in Column B, Form NJ-1040NR, or on Schedule
E, Form NJ-1041. This is the amount on which you will actually be taxed.

Review Part II of your Schedule NJ-K-1 for total payments made on behalf of shareholder. Include any amount
that is reported in Part II as estimated payments on your Form NJ-1040NR, or New Jersey Income Tax previously
paid on your Form NJ-1041.

If the S corporation in which you are a shareholder has no income allocated to New Jersey but you have income
from other New Jersey sources, report the amount of pro rata share of S corporation income from Schedule NJ-
K-1 on Schedule NJ-BUS-1 of Form NJ-1040NR, or Form NJ-1041.

Question S-2. What do I report if my non-electing federal S

corporation did not give me a Schedule NJ-K-1, Form CBT-100S?

A federal S corporation that has not elected to be a New Jersey S corporation is not likely to provide you with a
completed Schedule NJ-K-1, Form CBT-100S. Without that schedule, you will need to complete Reconciliation
Worksheet B to determine the income information necessary to prepare your New Jersey Income Tax return.

You must complete a separate Reconciliation Worksheet B for each S corporation that issued you a federal
Schedule K-1, Form 1120S, but not a corresponding Schedule NJ-K-1, Form CBT-100S.

Whether you are a resident or a nonresident, you must complete Reconciliation Worksheet B to determine the
correct amount of your net pro rata share of S corporation income, dividends, and gains. You must also use
Reconciliation Worksheet B to determine the balances of your New Jersey Earning & Profits Account (Worksheet
D), New Jersey Accumulated Adjustments Account (Worksheet C), and the New Jersey-adjusted basis of your
stock. You will have to obtain certain information – such as the amount of taxes based on income and interest
attributable to exempt obligations – from the S corporation to complete the worksheet.

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Income From S Corporations

Understanding Income Tax

If you are a shareholder in two or more S corporations, one or more of which has a loss for the tax year, see
question S-4 for rules regarding the priority and reporting of losses.

After completing Reconciliation Worksheet B, report your net pro rata share of S corporation income as follows:

S Corporations With No Income From New Jersey Sources

1. Enter the amount of New Jersey S corporation income from line 8 of Reconciliation Worksheet B on
Schedule NJ-BUS-1.

2. Add the income/loss from all S corporations listed on the Schedule NJ-BUS-1, subtracting losses from
income.

3. Enter the net total on the “Net pro rata share of S corporation income” line of Form NJ-1040, Column A
of Form NJ-1040NR, or Form NJ-1041. If you are a nonresident and have income from other New Jersey
sources, this amount is used to determine your income from all sources as if you were a New Jersey
resident.

S Corporations With Income From New Jersey Sources

1. Enter the amount of income not allocated to New Jersey from Part II, line 4 of Reconciliation Worksheet
B on Schedule NJ-BUS-1.

2. Add the income/loss from all S corporations listed on the Schedule NJ-BUS-1, subtracting losses from
income.

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  Income From S Corporations 

  Understanding Income Tax 

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Income From S Corporations

Understanding Income Tax

Instructions For Shareholder’s Reconciliation Worksheet B

S Corporation Information
Enter the name and federal identification number of the S corporation that issued the Schedule K-1, federal Form
1120S that is being reconciled. Enter your tax year.

Part I—Determining New Jersey S Corporation Income
Line 1 – Ordinary Income (Loss)
Enter on line 1 the amount of ordinary income (loss) reported on line 1 of Schedule K-1, federal Form 1120S.

Lines 2a through 2l – Other Income
Enter the amounts of income (loss) as reported on the corresponding lines of Schedule K-1, federal Form 1120S.

Line 3 – Income Subtotal
Add the amounts on line 1 and lines 2a through 2l, and enter the result on line 3.

Line 4a – IRC Section 179 Expense
Enter on line 4a any IRC Section 179 expense deduction reported on Schedule K-1, federal Form 1120S.

Line 4b – Excess Meal and Entertainment Expense
Enter on line 4b the meal and entertainment expenses that were not deductible for federal income tax purposes.
If not already provided, you must obtain this information from the S corporation.

Line 4c – Interest Income and Gains From Exempt Obligations
Enter on line 4c any interest income or gain that is excludable from income pursuant to N.J.S.A. 54A:6-14, 6-14.1,
and 5-1c that is already included in the amount reported on line 3. If not already provided, you must obtain this
information from the S corporation.

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                     Income From S Corporations 

                              Understanding Income Tax 

 Amounts you must report on this line include:  

  •    Interest  income  derived  from  debt  obligations  of  the  State  of  New  Jersey,  or  any  of  its  political 
       subdivisions (counties and municipalities), and gains attributed to the sale of those obligations; and  

  •    Obligations of the federal government, or any of its territories or agencies.  

 Line 4d – Charitable Contributions 
 Enter on line 4d any charitable contributions reported on Schedule K-1, federal Form 1120S. 

 Line 4e – Other Subtractions – Specify 
 Enter on line 4e any other items that are excludable or deductible from S corporation income under the New 
 Jersey Gross Income Tax Act. Include on this line any expenses incurred to generate interest income that is 
 excludable for federal income tax purposes, but that is includable in New Jersey income, i.e., interest income from 
 the obligations of states other than New Jersey.  

 Do not include unreimbursed business expenses or interest you paid on indebtedness that was incurred to 
 purchase your shares of S corporation stock. They are not deductible in determining net pro rata share of S 
 corporation income. 

 Line 4f – Total Subtractions 
 Add the amounts on lines 4a through 4e, and enter the result on line 4f.  

 Line 5 – Total 
 Subtract the amount on line 4f from the amount on line 3, and enter the result on line 5. 

 Line 6a – Interest Income From Other State and Municipal Bonds 
 Enter on line 6a the amount of any interest income derived from the obligations of states,  other than New 
 Jersey, and their political subdivisions (counties and municipalities) that is not already included in the amount 
 reported on line 3 . If not already provided, you must obtain this information from the S corporation. 

 Line 6b – Taxes Based on Income 
 Enter on line 6b your share of taxes based on income that was taken as a deduction by the S corporation on 
 federal Form 1120S to determine the ordinary income (loss) that you reported on line 1. If not already provided, 
 you must obtain this information from the S corporation. 

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                           Income From S Corporations 

                           Understanding Income Tax 

 Line 6c – Expenses to Generate Exempt Income 
 Enter on line 6c any:  

  • Interest on indebtedness incurred or continued;  
  • Expenses paid and incurred to purchase, carry, manage, or conserve; and  
  • Expenses of collection of the income or gain from tax-exempt debt obligations of the federal government, 
    or any of its territories or  agencies,  and debt obligations of the State of New Jersey,  or its political 
    subdivisions (counties and municipalities).  

 Any amount reported on this line must already be included in the amount reported on line 3 . If not already 
 provided, you must obtain this information from the S corporation. 

 Line 6d – Losses From Exempt Obligations 
 Enter on line 6d any losses attributable to tax-exempt debt obligations of the federal government, or any of its 
 territories or agencies, and obligations of the State of New Jersey, or its political subdivisions (counties and 
 municipalities). Any amount reported on this line must already be included in the amount reported on line 3. If 
 not already provided, you must obtain this information from the S corporation. 

 Line 6e – Total Additions 
 Add the amounts on lines 6a through 6d, and enter the result on line 6e. 

 Line 7 – Depreciation Adjustment From New Jersey Form GIT-DEP 
 A New Jersey depreciation adjustment is required if the federal special depreciation allowance, or IRC Section 
 179 expense,  was deducted for assets placed in service on or after January 1, 2004. Use Gross Income Tax 
 Depreciation Adjustment Worksheet GIT-DEP to calculate the depreciation adjustment for the assets’ initial year 
 and for subsequent years until the property is fully depreciated or disposed of; for adjustments to IRC Section 
 179 recapture income; and for adjustments to the gain or loss from the sale of such assets. Enter the result on 
 this line.  

 For New Jersey Income Tax purposes, the maximum IRC Section 179 expense the S corporation can deduct is 
 $25,000 (or $60,000 if New York Liberty Zone property is included). To determine the total amount deducted 
 federally by the S corporation, divide the IRC Section 179 expense listed on your federal K-1 by your ownership 
 percentage. If the total federal deduction exceeded $25,000 (or $60,000 if New York Liberty Zone property is 
 included), you must use Worksheet GIT-DEP to calculate your New Jersey depreciation adjustment. To complete 
 the form, you will need to obtain the necessary information from the S corporation, including the federal special 
 depreciation allowance. 
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Income From S Corporations

Understanding Income Tax

Line 8 – New Jersey S Corporation Income
Add the amounts on lines 5 and 6e, plus or minus line 7, and enter the result on line 8. If the S corporation had
income from New Jersey sources, go to Part II.

If the S corporation did not have income from New Jersey sources, enter the amount on this line on Schedule
NJ-BUS-1. Combine this amount with the income/loss from any other S corporations, and enter the total on Form
NJ-1040, in Column A of Form NJ-1040NR, or on Form NJ-1041.

Part II—Determining New Jersey Allocated Income
You do not need to complete Part II if the S corporation did not have any income from New Jersey sources.

Line 1 – New Jersey S Corporation Income
Enter on line 1 the amount reported on line 8, Part I of this worksheet.

Line 2 – Allocation Factor
Enter the allocation percentage from Schedule J, Form CBT-100. If not already provided, you must obtain this
information from the S corporation.

Line 3 – New Jersey Allocated Income
Multiply the amount on line 2 by the amount on line 1, and enter the result on line 3.

Line 4 – Income not Allocated to New Jersey
Subtract the amount on line 3 from the amount on line 1, and enter the result on line 4. This is the amount to
enter on Schedule NJ-BUS-1. It is combined with the income/loss from any other S corporations. The total should
be entered on Form NJ-1040, in Column A of Form NJ-1040NR, or on Form NJ-1041. Nonresidents do not include
this amount in Column B, Form NJ-1040NR, or on Schedule E, Form NJ-1041.

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                            Income From S Corporations 

                             Understanding Income Tax 

 Question S-3. How do I determine my reportable income from 

 an S corporation if I was a part-year resident/part-year 

 nonresident? 

 Part-Year Resident Return  
 As a part-year resident, you are required to file a part-year resident return (Form NJ-1040) covering the portion 
 of the year that you were a resident. Your part-year Form NJ-1040 must include your net pro rata share of S 
 corporation income as prorated for your period of New Jersey residency using your residency percentage. 

 If the S corporation was completely liquidated (see question S-11), you must also report the portion of your 
 gain or loss from the disposition of the corporation’s assets as prorated for your period of New Jersey residency 
 using your residency percentage. 

 Calculating the residency and nonresidency percentages. The residency percentage is the number of days of 
 the S corporation’s year, whether fiscal or calendar, that you were a New Jersey resident divided by 365 days, or 
 366 days for a leap year.  

 For example, if the S corporation’s fiscal year is October 1 through September 30 and you moved out of New 
 Jersey on April 15, then you were a New Jersey resident for 197 days of the S corporation’s fiscal year. Dividing 
 197 by 365 results in a residency percentage of 54%.  

 The nonresidency percentage is determined by subtracting the residency percentage from 100%, which in this 
 example is 46%. 

 Electing S Corporation. Use the following calculation to determine the prorated residency portion of your pro 
 rata share of S corporation income from a New Jersey electing S corporation: 

 Schedule NJ-K-1, Part II, line 3  ×  Your residency percentage  =  Net pro rata share of S corporation income to 
                             include on Schedule NJ-BUS-1 of Form NJ-1040 

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                          Income From S Corporations 

                            Understanding Income Tax 

 If the S corporation was completely liquidated, the Schedule NJ-K-1, Form CBT-100S you receive from a New 
 Jersey electing S corporation will separately state your total gain (loss) from disposition of the corporation’s 
 assets. Use the following calculation to determine the prorated residency portion: 

  Schedule NJ-K-1, Part II, line 6  ×  Your residency percentage  =  Gain (loss) to include on the line for “Net 
                      gains or income from disposition of property” on Form NJ-1040 

 Non-electing S Corporation.  If you completed Part II, Reconciliation Worksheet B, use the following formula 
 to determine the prorated residency portion of your pro rata share of S corporation income from a non-electing 
 federal S corporation:  

  Part II, line 4  ×  Your residency percentage  =  Net pro rata share of S corporation income to include on 
                            Schedule NJ-BUS-1 of Form NJ-1040 

 If you did not complete Part II, use the following calculation:  

  Part I, line 8  ×  Your residency percentage  =  Net pro rata share of S corporation income to include on 
                            Schedule NJ-BUS-1 of Form NJ-1040 

 For more information regarding Reconciliation Worksheet B, see question S-2. 

 If the S corporation was completely liquidated, the Reconciliation Worksheet B – Liquidated that you prepared 
 for the non-electing federal S corporation should separately state in Column A your S corporation Income 
 Prior to Disposition of Assets, and in Column B, your Income, Gains/Losses from Disposition of Assets in Complete 
 Liquidation. If you completed Part II, you should list the amounts allocated and not allocated to New Jersey. 

 If you completed Part II, Reconciliation Worksheet B – Liquidated, use the following formula to determine the 
 prorated residency portion of your pro rata share of S corporation:  

  Part II, Column A, line 4A  ×  Your residency percentage  =  Net pro rata share of S corporation income to 
                            include on Schedule NJ-BUS-1 of Form NJ-1040 

 If you did not complete Part II, use the following calculation: 

  Part I, Column A, line 8A  ×  Your residency percentage  =  Net pro rata share of S corporation income to 
                            include on Schedule NJ-BUS-1 of Form NJ-1040 

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                          Income From S Corporations 

                              Understanding Income Tax 

 If you completed Part II, Reconciliation Worksheet B – Liquidated, use the following calculation to determine the 
 prorated residency portion of your income, gains/losses from disposition of assets in complete liquidation:  

  Part II, Column B, line 4B  ×  Your residency percentage  =  Gain (loss) to include on the line for “Net gains or 
                          income from disposition of property” on Form NJ-1040 

 If you did not complete Part II, use the following calculation:  

  Part I, Column B, Line 8B  ×  Your residency percentage  =  Gain (loss) to include on the line for “Net gains or 
                          income from disposition of property” on Form NJ-1040 

 For more information regarding Reconciliation Worksheet B – Liquidated, see question S-11. 

 Part-Year Nonresident Return  
 If you were a part-year nonresident and had income from New Jersey sources during that period, you are required 
 to file a part-year nonresident return, (Form NJ-1040NR) covering the portion of the tax year that you were a 
 nonresident. Your part-year Form NJ-1040NR must include in Column A your net pro rata share of S corporation 
 income as prorated using the nonresidency percentage. In Column B, you must include your net pro rata share 
 of S corporation income allocated to New Jersey as prorated using your nonresidency percentage. 

 If the S corporation was completely liquidated, you must also report your net gain (loss) from the sale of the 
 corporation’s assets allocated to New Jersey as prorated using your nonresidency percentage. 

 Electing S Corporation. Use the following calculation to determine the prorated amount of your net pro rata 
 share of S corporation income from everywhere: 

  Schedule NJ-K-1, Part II, line 3  ×  Your nonresidency percentage  =  Net pro rata share of S corporation 
  income to include on Schedule NJ-BUS-1 for Column A for Form NJ-1040NR 

 If the S corporation was completely liquidated, use the following calculation to determine the prorated amount 
 of your gain (loss) from disposition of the corporation’s assets from everywhere:  

  Schedule NJ-K-1, Part II, Line 6  ×  Your nonresidency percentage  =  Gain (loss) to include in Column A, Form 
  NJ-1040NR on the line for “Net gains or income from disposition of property” 

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                           Income From S Corporations 

                            Understanding Income Tax 

 Use the following calculation to determine the prorated portion of your pro rata share of S corporation income 
 from New Jersey sources:  

  Schedule NJ-K-1, Part II, line 1  ×  Your nonresidency percentage  =  Net pro rata share of S corporation 
                            income to include in Column B, Form NJ-1040NR  

 Use the following calculation to determine the  prorated  amount of your  gain  (loss) from the  sale of the 
 corporation’s assets from New Jersey sources: 

  Schedule NJ-K-1, Part II, line 4  ×  Your nonresidency percentage  =  Gain (loss) to include in Column B, Form 
            NJ-1040NR on the line for “Net gains or income from disposition of property” 

 Non-electing S Corporation. If you are a part-year nonresident and a shareholder of a non-electing federal S 
 corporation, you are not subject to tax on the portion of your S corporation income that is attributable to the 
 part of the year that you were a nonresident. If, however, you have income from other New Jersey sources during 
 the portion of the year that you were a nonresident, you must include on Schedule NJ-BUS-1 for Column A of 
 Form NJ-1040NR the prorated portion of the S corporation income that is not allocated to New Jersey while you 
 were a nonresident. If you completed Part II, Reconciliation Worksheet B, use the following calculation: 

  Part II, line 4  ×  Your nonresidency percentage  =  Net pro rata share of S corporation income to include on 
                           Schedule NJ-BUS-1 for Column A for Form NJ-1040NR 

 If you did not complete Part II, use the following calculation:  

  Part I, line 8  ×  Your nonresidency percentage  =  Net pro rata share of S corporation income to include on 
                           Schedule NJ-BUS-1 for Column A for Form NJ-1040NR 

 For more information regarding Reconciliation Worksheet B, see question S-2. 

 If the S corporation was completely liquidated, the Reconciliation Worksheet B – Liquidated you prepared for 
 the non-electing federal S corporation separately states in Column A your S corporation Income Prior to 
 Disposition of Assets and, in Column B, your Income, Gains/Losses from Disposition of Assets in Complete 
 Liquidation. If you completed Part II, you also should list the amounts allocated and not allocated to New Jersey.  

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         Income From S Corporations 

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 If you completed Part II, Reconciliation Worksheet B – Liquidated, use the following calculation to determine the 
 prorated nonresidency portion of your pro rata share of S corporation income: 

  Part II, Column A, line 4A  ×  Your nonresidency percentage  =  Net pro rata share of S corporation income to 
         include on Schedule NJ-BUS-1 for Column A of Form NJ-1040NR 

 If you did not complete Part II, use the following calculation: 

  Part I, Column A, line 8A  ×  Your nonresidency percentage  =  Net pro rata share of S corporation income to 
         include on Schedule NJ-BUS-1 for Column A of Form NJ-1040NR 

 If you completed Part II, Reconciliation Worksheet B – Liquidated, use the following calculation to determine the 
 prorated nonresidency portion of your income, gains/losses from disposition of assets in complete liquidation: 

  Part II, Column B, line 4B  ×  Your nonresidency percentage  =  Gain (loss) to include in Column A, Form NJ-
         1040NR on the line for “Net gains or income from disposition of property” 

 If you did not complete Part II, use the following calculation:  

  Part I, Column B, line 8B  ×  Your nonresidency percentage  =  Net pro rata share of S corporation income to 
         include on Schedule NJ-BUS-1 for Column A of Form NJ-1040NR 

 For more information regarding Reconciliation Worksheet B – Liquidated, see question S-11. 

 Question S-4. As a shareholder in multiple S corporations, how 

 can I use S corporation losses on my New Jersey Income Tax 

 return? 

 You may use the pro rata share of loss from one S corporation to offset, or cancel out, the pro rata share of 
 income from another S corporation – provided the income and loss occurred in the same tax year. However, you 
 can only use a loss if it does not exceed your New Jersey adjusted basis in that S corporation. 

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Income From S Corporations

Understanding Income Tax

You cannot use a loss from a prior year to offset a current year’s income, and you cannot carry an unused loss
into a subsequent tax year. Any S corporation losses that you are unable to use in the current year will be an
adjustment to the basis of that S corporation when you sell your shares. Because there are no passive loss
limitations in the New Jersey Gross Income Tax Act, any federal limitations regarding passive losses do not apply
when determining the portion of a loss that can be used to offset income on your State return.

Rules of priority for determining the use and assignment of S corporation losses are only necessary under the
following conditions:

• You are a shareholder in three or more S corporations; and
• Your total usable S corporation losses exceed your total pro rata share of S corporation income; and
• The losses were generated by two or more S corporations.

Shareholder in Two S Corporations
If you are a shareholder in only two S corporations, rules for determining the priority of losses are unnecessary.
If either S corporation has a loss, compare the New Jersey adjusted basis of the S corporation that generated the
loss against the amount of its loss to determine the usable portion of that loss, which does not exceed your New
Jersey adjusted basis. Only the usable portion of the loss can offset income from the other S corporation.

Enter the income/usable loss from each S corporation on Schedule NJ-BUS-1. Add these amounts, netting income
with losses, and enter the total on the “Net pro rata share of S corporation income” line of Form NJ-1040, Column
A of Form NJ-1040NR, or Form NJ-1041. If zero or less, make no entry on Form NJ-1040, or enter zero on Form
NJ-1040NR or NJ-1041.

Shareholder in Three or More S Corporations
As a shareholder in three or more S corporations, you must follow these steps to determine the correct amount
of net pro rata share of S corporation income to report on your Income Tax return.

Step 1.
Determine the total amount of your pro rata share of S corporation income.

Step 2.
Determine the total amount of your usable loss from each S corporation by comparing the New Jersey adjusted
basis of that S corporation to the amount of its loss. You can only use the portion of each S corporation’s loss
that does not exceed your New Jersey adjusted basis to offset income from other S corporations.
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Income From S Corporations

Understanding Income Tax

For example, if an S corporation has a loss of $1,000, and your New Jersey adjusted basis is $800, then you can
only use $800 to offset another S corporation’s income. If another S corporation’s income is $500, you would be
able to offset that income with $500 of the $800 useable loss. The remaining $300 loss can only be used to adjust
your basis when you sell your shares. Add the amount of usable loss from each S corporation to determine the
total amount of usable S corporation losses received from the S corporations for the tax year.

(See question S-8 for information on determining your New Jersey adjusted basis.)

Step 3. Income Exceeds Losses.
Go to step 4 if the total amount of usable losses exceeds the total amount of income .

If the total income exceeds or is equal to the total usable losses , enter the income/usable loss from each S
corporation on Schedule NJ-BUS-1. Total these amounts, and enter the result on Form NJ-1040, in Column A of
Form NJ-1040NR, or on Form NJ-1041. If zero or less, make no entry on Form NJ-1040, or enter zero on Form
NJ-1040NR or NJ-1041.

Step 4. Losses Exceed Income.
If the total amount of usable losses exceeds the total amount of income, then rules of priority must be used. You
must prorate each S corporation’s usable loss based on its percentage of the total amount of usable losses for
the period.

a. Determine the prorated amount of each S corporation’s usable loss by dividing that S corporation’s usable
loss by the amount of total usable losses for the period. Then, multiply the result by the total amount of
your S corporation income.

b. Subtract the prorated usable loss of an S corporation from its full usable loss to determine the remainder
of usable loss for that S corporation.

c. Enter the income/prorated usable loss from each S corporation on Schedule NJ-BUS-1. Total these
amounts, and enter the result on the “Net pro rata share of S corporation income” line of Form NJ-1040,
Column A of Form NJ-1040NR, or Form NJ-1041. If zero or less, make no entry on Form NJ-1040, or enter
zero on Form NJ-1040NR or NJ-1041.

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                          Income From S Corporations 

                                  Understanding Income Tax 

 Example 1 
 A resident taxpayer is a shareholder in four different S corporations. Their pro rata share from each S corporation 
 for Tax Year 2021 is as follows: 

           S CORP                              Pro rata share        New Jersey Adjusted Basis 
           ABC                                  $4,000               $4,500 
           XYZ                                  ($1,000)             $1,500 
           UFO                                  ($2,500)             $3,000 
           BMOC                                 ($1,500)             $2,000 

 Because the taxpayer is a shareholder in four different S corporations (three of which generated losses), and their 
 total pro rata share of S corporation losses exceeds their total pro rata share of S corporation income, they must 
 use the rules of priority to determine the portion of each S corporation’s loss that can be used to offset their 
 total pro rata share of S corporation income. 

 Step 1: 
  Total pro rata share of S corporation income from ABC:      $4,000 

 Step 2: 
  Usable S corporation losses from: 

                                                       New Jersey 
           S CORP                    Loss       Adjusted Basis       Usable Loss 
           XYZ                       ($1,000)             $1,500     ($1,000) 
               UFO                   ($2,500)             $3,000     ($2,500) 
           BMOC                      ($1,500)             $2,000     _($1,500)_ 
                                                                     ($5,000) 
           Total amount of usable S corporation losses: 
  
 Step 3: 
  Since the total usable losses exceed total S corporation income, the taxpayer goes to step 4. 
                           
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                          Income From S Corporations 

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 Example 1, continued 
 Step 4: 
  a. Prorated portion of usable S corporation losses: 

                                                              Total   Prorated amount 
                                                         Income       of usable loss 
          XYZ usable loss     ($1,000) 
          Total usable losses ($5,000) =   (.20)       × $4,000     = ($800) 

          UFO usable loss     ($2,500) 
                                       =   (.50)       × $4,000     = ($2,000) 
          Total usable losses ($5,000) 

          BMOC usable loss    ($1,500) 
          Total usable losses ($5,000) =   (.30)       × $4,000     = ($1,200) 

                                Total prorated usable losses:         ($4,000) 

  b. 
                                                       Prorated       Remainder of 
           S CORP              Usable loss           ̶              = 
                                                       usable loss    usable loss 
                      XYZ       ($1,000)               ($  800)       ($200) 
                      UFO       ($2,500)               ($2,000)       ($500) 
                      BMOC      ($1,500)               ($1,200)       ($300) 

  The taxpayer  will add any remainder  of usable loss  to  their basis whens  they  sell  their  shares of  the S 
  corporation stock.  

  c. Pro rata share of S corporation income/prorated usable loss to report on Schedule NJ-BUS-1: 

                                        ABC:           $4,000 
                                         XYZ:          ($800) 
                                        UFO:  ($2,000) 
                                       BMOC:  ($1,200) 
         Net pro rata share of S corporation income:     $0 
                               
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                           Income From S Corporations 

                            Understanding Income Tax 

 Example 2 
 A taxpayer is a shareholder in five different S corporations. Their pro rata share from each S corporation for Tax 
 Year 2021 is as follows: 

           S CORP                              Pro rata share     New Jersey Adjusted Basis 
         Whatchamacallit                        $27,600           $  3,098 
         Thingamajig, Inc.                      ($49,192)         $10,580 
         Doohickey Corp.                        $32,358           $11,267 
         Widget, Inc.                           ($18,628)         $13,756 
         Doodad & Co.                           ($85,726)         $17,125 

 Step 1: 
 Pro rata share of S corporation income from:                 Whatchamacallit  $27,600 
                                                              Doohickey Corp.  $32,358 
 Total pro rata share of S corporation income:                    $59,958 

 Step 2: 
 Usable S corporation losses from: 
                                                New Jersey 
           S CORP                   Loss        Adjusted Basis    Usable Loss 
           Thingamajig, Inc.        ($49,192)             $10,580 ($10,580) 
           Widget, Inc.             ($18,628)             $13,756 ($13,756) 
           Doodad & Co.             ($85,726)             $17,125 _($17,125)_ 
           Total amount of usable S corporation losses:           ($41,461) 

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                    Income From S Corporations 

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 Step 3: 
 Since the total amount of usable losses is less than the total pro rata share of S corporation income, there is no 
 need to prorate the losses. Total pro rata share of S corporation income is reduced by the total usable losses on 
 Schedule NJ-BUS-1: 
                     Whatchamacallit:                $27,600 
                     Thingamajig, Inc.:  ($10,580) 
                     Doohickey Corp.:                $32,358 
                      Widget, Inc.:  ($13,756) 
                     Doodad & Co.:  ($17,125) 
         Net pro rata share of S corporation income: $18,497 
   
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                       Income From S Corporations 

                               Understanding Income Tax 

  Example 3 
  A taxpayer is a shareholder in five different S corporations. Their pro rata share from each S corporation for 
  Tax Year 2021 is as follows: 

          S CORP                     Pro rata share                New Jersey Adjusted Basis 
          Red, Inc.                             $15,493                $  6,428 
          Orange, Inc.                          $26,189                $93,186 
          Yellow & Co.                          ($13,872)              $  9,842 
          Green, Inc.                           ($54,975)              $36,871 
          Blue                                  ($73,478)              $16,984 

  Step 1: 
  Pro rata share of S corporation income from:              Red, Inc.  $15,493 
                                                          Orange, Inc. $26,189 
  Total pro rata share of S corporation income:                        $41,682 

  Step 2: 
  Usable S corporation losses from: 

                                                New Jersey 
               S CORP                Loss       Adjusted Basis         Usable Loss 
          Yellow & Co.               ($13,872)            $  9,842     ($  9,842) 
          Green, Inc.                ($54,975)            $36,871      ($36,871) 
          Blue                       ($73,478)            $16,984      _($16,984)_ 
                                                                       ($63,697) 
               Total amount of usable S corporation losses: 
  
  Step 3: 
  Since the total amount of usable S corporation losses exceeds the total pro rata share of S corporation 
  income, they go to step 4. 
                        
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                           Income From S Corporations 

                              Understanding Income Tax 

  Step 4: 
  a.    Prorated portion of usable S corporation losses: 

                                                                  Total     Prorated amount 
                                                          Income            of loss 
          Yellow & Co. usable loss ($9,842) 
                                            =  (.1545)  × $41,682         = ($6,440) 
          Total usable losses ($63,697) 

          Green, Inc. usable loss ($36,871) 
                                            =  (.5789)  × $41,682         = ($24,130) 
          Total usable losses ($63,697) 

          Blue usable loss    ($16,984) 
          Total usable losses ($63,697)     =  (.2666)  × $41,682         = ($11,112) 

                               Total prorated usable losses:                ($41,682) 

  b. 
                                                          Prorated          Remainder of 
           S CORP             Usable loss               ̶                 = 
                                                          amount of loss    usable loss 
           Yellow & Co.        ($  9,842)                 ($  6,440)        ($3,402) 
           Green, Inc.         ($36,871)                  ($24,130)         ($12,741) 
           Blue                ($16,984)                  ($11,112)         ($5,872) 

  c.    Pro rata share of S corporation income/prorated usable loss to report on Schedule NJ-BUS-1: 

                                        Red, Inc.:        $15,493 
                               Orange, Inc.:              $26,189 
                               Yellow & Co.:  ($ 6,440) 
                               Green, Inc.:  ($24,130) 
                                             Blue:  ($11,112) 
        Net pro rata share of S corporation income:       $0 

 The taxpayer will add any remainder of usable loss to their basis when they sell their shares of the S corporation 
 stock. 
                            
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                          Income From S Corporations 

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 Example 4 
 A taxpayer is a shareholder in four different S corporations. Their pro rata share from each S corporation for Tax 
 Year 2021 is as follows: 

           S CORP                         Pro rata share            New Jersey Adjusted Basis 
          Profits R Us                     $50,000                                 $10,000 
          Inatechs Inc.                    ($20,000)                               $12,000 
          Encom & Co.                      ($15,000)                               $18,000 
          NextThing                        ($18,000)                               $25,000 

 Step 1: 
 Total pro rata share of S corporation income from Profits R Us     $50,000 

 Step 2: 
  b.    Usable S corporation losses from: 

                                                                    New Jersey 
         S CORP            Loss                                     Adjusted Basis Usable Loss 
        Inatechs Inc.     ($20,000)                                 $12,000         ($12,000) 
        Encom & Co.       ($15,000)                                 $18,000         ($15,000) 
        NextThing         ($18,000)                                 $25,000        _($18,000)_ 
                                                                                    ($45,000) 
                           Total amount of usable S corporation losses: 

 Step 3: 

 Since the total amount of usable losses is less than the total pro rata share of S corporation income, there is no 
 need to prorate the losses. Total pro rata share of S corporation income is reduced by the total usable losses on 
 Schedule NJ-BUS-1: 
                                          Profits R Us:  $50,000 
                                         Inatechs Inc.:  ($12,000) 
                                    Encom & Co.:  ($15,000) 
                                          NextThing:  ($18,000) 
         Net pro rata share of S corporation income:     $5,000 

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Income From S Corporations

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Question S-5. As a New Jersey resident shareholder of an S

corporation, am I entitled to a credit for the taxes I paid to

another jurisdiction on my S corporation income?

If you paid income taxes or wage taxes to another jurisdiction on your S corporation income, and that income
also is taxed in New Jersey in the same tax year, you may be entitled to a credit on Form NJ-1040 or Form NJ-
1041 provided the S corporation income is properly allocated outside New Jersey.

Income Not Eligible for a Credit
A credit is not allowed:

• For any tax imposed by another jurisdiction on S corporation income that is allocated to New Jersey
(N.J.S.A. 54A:4-1(c));

• For any taxes paid or accrued on, or measured by profits or income that is imposed on, or paid on behalf
of a person other than the taxpayer, whether or not the taxpayer can be held liable for the tax (N.J.S.A.
54A:4-1(d)). An example is Philadelphia Business Income and Receipts Tax (BIRT) paid on S corporation
income;

• If the New Jersey tax is attributable to distributions received, and those distributions are taxable to the
taxpayer as dividends or as gains from the disposition of property. For more information regarding
dividends and gains, see question S-9.

S corporation income allocated to New Jersey is defined as the portion of the S corporation income that is
allocated to New Jersey by the allocation factor of the S corporation. S corporation income not allocated to New
Jersey is S corporation income less S corporation income allocated to New Jersey.

To properly determine the New Jersey allocation factor, the S corporation must complete Schedule J, Form CBT-
100S. The allocation factor should be applied to the shareholder’s net pro rata share of S corporation income to
determine the amount of income allocated inside and outside New Jersey. Only the income allocated outside
New Jersey can be used to calculate a credit for taxes paid to other jurisdictions. If the S corporation does not
complete Schedule J, we will deny the credit for taxes paid to other jurisdictions on the S corporation income.

To claim a credit for taxes paid to another jurisdiction, you must complete Schedule NJ-COJ, Form NJ-1040, or
Schedule C, Form NJ-1041. If you are claiming a credit for taxes paid to more than one jurisdiction, you must
complete a separate Schedule NJ-COJ, or Schedule C, for each jurisdiction. GIT-9S
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                      Income From S Corporations 

                      Understanding Income Tax 

 If, as a shareholder of an S corporation, you participated in one or more nonresident composite returns filed by 
 the S corporation on behalf of its shareholders in other states, we will accept a certified schedule from the S 
 corporation specifying your share of S corporation income allocated to each state, and the amount of tax paid 
 to that state. If you are claiming a credit for S corporation income deemed to be allocated outside New Jersey, 
 you must keep copies of the documentation that show the taxes paid to the other jurisdiction, both by the S 
 corporation as well as the personal Income Tax you paid. 

 (See the instructions for Form NJ-1040 for more information regarding the credit for taxes paid to another 
 jurisdiction, or see Credit for Taxes Paid to Other Jursidictions (Business/Nonwage Income). 

 When completing line 1, Schedule NJ-COJ, Form NJ-1040, you can only include income that is actually taxed by 
 both New Jersey and the other jurisdiction. If the other jurisdiction requires you to report S corporation income 
 (loss) in separate categories (e.g., S corporation income, interest, gains, or modifications), you must combine any 
 amounts derived from the S corporation when determining the amount of income eligible for the credit. 

 Question S-6. How do I calculate my New Jersey Accumulated 

 Adjustments Account (AAA)? 

 Whether you are a resident shareholder in an electing or non-electing federal S corporation, you are required to 
 make the necessary adjustments to your New Jersey AAA. You must retain all account information until you 
 dispose of your shares of the S corporation. 

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Income From S Corporations

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Instructions For Completing Worksheet C

Allocation Factor. The allocation factor inside New Jersey is calculated by the S corporation and must be
provided to you or obtained from the corporation. The percentage of income, gain, loss, or expenses allocated
outside New Jersey is determined by subtracting the inside-New Jersey factor from 100%.

Line 1. The beginning balance of your New Jersey AAA will be “0” (zero) for the first tax year. For all subsequent
years, the beginning balance will be the ending balance from the year before. Indicate the date of the beginning
balance.

Line 2. Your New Jersey AAA must be adjusted annually by the amount of the net pro rata share of S corporation
income (or loss) you received from the S corporation during the tax year. For a resident shareholder in a New
Jersey electing S corporation, the net pro rata share of S corporation income will be the income allocated within
and outside New Jersey.

For a resident shareholder of a non-electing federal S corporation, the net pro rata share of S corporation
income will be the income (loss) allocated outside New Jersey. This is the amount from Part II, Reconciliation
Worksheet B or, if Part II is not completed, the New Jersey S corporation income amount from Part I.

Line 3. Your New Jersey AAA must be adjusted to include any New Jersey tax-exempt income, gains, or losses
the S corporation earned during the tax year. You determine the total amount of New Jersey tax-exempt income,
gains, or losses by subtracting the amount on line 6d, Part I, Reconciliation Worksheet B from the amount on line
4c, Part I, Reconciliation Worksheet B.

If you are a resident shareholder of a non-electing federal S corporation that had income allocated to New
Jersey, you must determine the amount of tax-exempt income, gains, or losses allocated outside New Jersey.
This amount is calculated by multiplying the total of line 4c minus line 6d from Part I, Reconciliation Worksheet
B by the outside-New Jersey percentage.

Line 4. Add lines 1 through 3 and enter the result on line 4.

Line 5. Any other reductions made to your federal AAA or federal Other Adjustments Account (OAA) must also
be made to your New Jersey AAA, provided that these reductions have not already been taken into consideration
in calculating S corporation income on line 8, Part I, Reconciliation Worksheet B. Other reductions include, but
are not limited to, the following items when made or paid by the S corporation:

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Income From S Corporations

Understanding Income Tax

• Taxes based on income, business presence, or activity;

• Health or life insurance;

• Fines or penalties; and

• Club dues.

If not already provided, you must obtain this information from the S corporation.

You also must reduce New Jersey AAA by any expenses the S corporation incurred to generate New Jersey tax-
exempt income, gains, or losses. If the S corporation had no income allocated to New Jersey, enter on this line
the amount from line 6c, Part I, Reconciliation Worksheet B. If, however, the S corporation had income allocated
to New Jersey, then you must reduce New Jersey AAA by the portion of expenses incurred to generate tax-
exempt income, gains, or losses allocated outside New Jersey by multiplying the amount from line 6c by the
outside-New Jersey percentage.

Line 6. You must reduce your New Jersey AAA by the amount of any distributions you received from the S
corporation during the year. For New Jersey Income Tax purposes, distributions must be treated in the same
manner as for federal purposes.

Line 7. Add lines 5 and 6 and enter the result on line 7.

Line 8. Subtract line 7 from Line 4 to determine your ending balance for the year. It is possible that the ending
balance of your New Jersey AAA will be negative. Indicate the date of the ending balance.

Question S-7. How do I calculate the balance of my New Jersey

Earnings and Profits (E&P) Account?

Initial New Jersey E&P

Electing S Corporation. If you are a shareholder in a New Jersey electing S corporation, the initial beginning
balance of your New Jersey E&P Account will be the retained earnings of the corporation before electing New
Jersey status. If the retained earnings of the corporation prior to the New Jersey election is a negative amount,
enter “0” (zero).

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Income From S Corporations

Understanding Income Tax

Non-electing S Corporation. If you are a shareholder in a non-electing federal S corporation, the initial
beginning balance of your New Jersey E&P Account will be the total of the beginning balances of your federal
Accumulated Adjustments Account (AAA) and your federal Other Adjustments Account (OAA) for the
corporation’s first tax year that begins on or after July 7, 1993, plus any remaining federal accumulated E&P at
that time. If, however, the total is a negative amount, the initial beginning balance of your New Jersey E&P
Account is “0” (zero).

Hybrid Corporations. If you are a shareholder in a hybrid corporation, you can calculate the initial beginning
balance of your New Jersey E&P Account in the same manner as described above for a non-electing federal S
corporation.

Federal S Corporation Formed After July 7, 1993. A federal S corporation that is newly incorporated after July
7, 1993, should not have any accumulated E&P. Consequently, the initial beginning balance of your New Jersey
E&P Account will be “0” (zero). This will be true whether or not the federal S corporation is a New Jersey electing
S corporation.

Year-End Balance
Complete Worksheet D or Worksheet E to record annual changes to your E&P Account and to determine your
year-end balance.

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              Income From S Corporations 

                                Understanding Income Tax 

              Instructions For Completing Worksheet D 

 If you are a shareholder in an electing New Jersey S corporation, you must complete Worksheet D annually so 
 that you can properly track your New Jersey Earnings and Profits Account. 

 Line 1. See “Initial New Jersey E&P” to determine the initial beginning balance of your New Jersey E&P Account. 
 For subsequent tax years, the beginning balance will be the ending balance from the year before. Indicate the 
 date of the beginning balance. 

 Line 2. Any other additions or adjustments made to your federal E&P Account must also be made to your New 
 Jersey E&P Account. If not already provided, you must obtain this information from the S corporation. 

 Line 3. Enter the total of line 1 plus line 2. 

 Line 4. Determine the amount of dividends received from the S corporation during the tax year and enter the 
 amount on line 4. For more information regarding dividends and gains, see question S-9. 

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Understanding Income Tax

Instructions For Completing Worksheet E

If you are a shareholder in a non-electing federal S corporation, you must complete Worksheet E annually so
that you are able to properly track your New Jersey Earnings and Profits Account. If you are a shareholder in a
hybrid corporation, you will apply the corporation’s allocation factor to determine the income, other
additions/adjustments, and dividends received that are allocated to New Jersey.

Line 1. See “Initial New Jersey E&P” to determine the initial beginning balance of your New Jersey E&P Account.
For subsequent tax years, the beginning balance will be the ending balance from the previous year. Indicate the
date of the beginning balance.

Line 2. Each year the beginning balance of your New Jersey E&P Account must be increased by the amount of
any S corporation income allocated to New Jersey for the tax year. If the S corporation had no income allocated
to New Jersey, proceed to line 3. Otherwise, enter on this line the amount from line 3, Part II, Reconciliation
Worksheet B.

Line 3. Any other additions or adjustments made to your federal E&P Account must also be made to your New
Jersey E&P Account. If not already provided, you must obtain this information from the S corporation.

Line 4. Add lines 1, 2, and 3, and enter the result on line 4.

Line 5. Determine the amount of dividends received from the S corporation during the tax year and enter the
amount on line 5. For more information regarding dividends and gains, see question S-9.

Line 6. Subtract line 5 from line 4 and enter the result on line 6. Indicate the date of the ending balance.

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                              Income From S Corporations 

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 Question S-8. How do I determine my New Jersey basis? 

 Initial New Jersey Basis  
 Resident. If you were a shareholder of an S corporation on January 1, 1994, your initial basis in the stock and 
 indebtedness of the S corporation is the basis of the stock determined on that date as if the S corporation were 
 a C corporation, plus any indebtedness of the S corporation to you. This is true for the basis of both electing and 
 non-electing S corporations. 

 If you were not a resident shareholder of an S corporation on January 1, 1994, but you became one thereafter, 
 your initial basis in the stock and indebtedness of the S corporation is your federal basis determined as of the 
 latest of the following events: 

  •    The date you last became a resident of New Jersey; 

  •    The date you acquired the stock of the S corporation; or 

  •    The effective date of the corporation’s most recent federal S election. 

 Nonresident. If you are a nonresident shareholder, your initial basis in the stock and indebtedness of an S 
 corporation is “0” (zero) as of the latest of the following: 

  •    The date you last became a nonresident of New Jersey; 

  •    The date on which you acquired the stock of the S corporation; 

  •    The effective date of the corporation’s most recent federal S election; or 

  •    The effective date of the corporation’s most recent New Jersey S election. 

 Adjustments to New Jersey Basis 
 You must make adjustments to your initial New Jersey basis in accordance with federal rules. However, they are 
 limited to the S corporation income or hybrid corporation income that is included in your New Jersey net pro 
 rata share of S corporation income. In addition, you must add back your New Jersey tax-exempt gains and income 
 and subtract any expenses paid or incurred in generating such exempt gains and income. You cannot take into 
 account any adjustments made to your federal basis in the S corporation prior to January  1,  1994,  when 
 determining your New Jersey adjusted basis. 

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                     Income From S Corporations 

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 New Jersey Adjusted Basis 
 Your New Jersey adjusted basis is determined at the close of the S corporation’s tax year, or upon your full or 
 partial disposition of stock, and is comprised of the following: 

  • Initial New Jersey stock basis; 

  • Additional capital contributions; 

  • The cost of purchasing additional stock; 

  • The balance of your New Jersey AAA; and 

  • The net of indebtedness owed to you by the S corporation and indebtedness you owe to the S corporation. 

 You must decrease your New Jersey stock basis by the amount of any nontaxable, nonliquidating distributions 
 you received (or are deemed to have received) from the S corporation.  (See question S-9  for information 
 regarding the taxability of S corporation distributions.) 

 You cannot adjust your New Jersey adjusted basis in the stock below zero. S corporation losses that you are 
 unable to use for New Jersey Income Tax purposes to offset income from another S corporation in the year the 
 losses are incurred cannot be used to offset S corporation income in any other tax year. However, such 
 unused losses can be used to adjust your New Jersey adjusted basis when calculating your gain (loss) from the 
 disposition of your shares of the S corporation. 

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Income From S Corporations

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Question S-9. How do I report my distributions?

You must account for and/or report the actual total amount of cash, noncash, and property distributed to you
from the corporation. You must include a statement, signed by you, with your return detailing any installment
notes you received.

For New Jersey Income Tax purposes, the taxability of a distribution from an S corporation is governed by the
priority system established in IRC Sections 1368 and 1371 and must be calculated after the close of the S
corporation’s tax year. In general, to determine the taxability of a distribution, you must first apply a distribution
against your New Jersey AAA balance, then against your New Jersey E&P balance, and finally against your New
Jersey adjusted stock basis.

New Jersey does not tax distributions made to nonresident shareholders. However, if you are a nonresident
shareholder and you have income from other New Jersey sources, you will have to report any taxable portion of
your distribution in Column A, Form NJ-1040NR or on Form NJ-1041 as if you were a resident.

Because you are required to use your New Jersey AAA, the portion of the distribution that is not taxable for New
Jersey purposes will usually differ from the amount that is not taxable for federal purposes. The same will be true
for the taxable amounts of dividends and gains resulting from the distribution since you are using your New
Jersey E&P and New Jersey adjusted stock basis.

You must reduce your New Jersey adjusted basis by the amount of any nontaxable, nonliquidating distribution
received or deemed to have been received. In addition, you must reduce your New Jersey E&P Account by the
amount of dividends you received from the S corporation distribution that are taxable for New Jersey Income
Tax purposes.

S corporation distributions paid out of your E&P Account are reported as dividends.

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                       Income From S Corporations 

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 New Jersey Hybrid Corporation Distributions  

 A distribution from a hybrid corporation must be allocated, based on the corporation’s New Jersey allocation 
 factor, to both the income earned inside New Jersey and the income earned outside New Jersey. Distributions 
 that are applicable to the income earned inside New Jersey are taxable distributions from a C corporation, and 
 are reportable by a resident shareholder as dividends. The taxability of distributions applicable to the income 
 earned outside New Jersey is governed by IRC Sections 1368 and 1371 as stated above. 

 Post-termination distributions 

 New Jersey treats cash distributions from an S corporation during a post-termination transition period in the 
 same manner as they are treated for federal purposes under IRC Section 1371. You must use the New Jersey 
 adjusted basis of your stock and your New Jersey AAA and E&P account balances. 

 Example 1 
 A taxpayer is the sole shareholder of an S corporation. The federal adjusted basis of their stock at the end of the 
 tax year is $100,000, which is comprised of: 

                       Federal AAA                 $90,000 
                       Federal Balance of Basis    $10,000 

 The New Jersey adjusted basis of their stock at the end of the tax year is $20,000, which is made up of: 

                       New Jersey AAA              $10,000 
                       New Jersey Balance of Basis $10,000 

 In addition, the balance of their New Jersey E&P Account is $80,000. 

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 The S corporation made a distribution of $10,000 in April 2021, and a distribution of $30,000 in November 2021. 

                                          FEDERAL 

                                          Nontaxable                        Capital Gain 
                          Distribution    amount           Dividend amount        amount 
   Total Distributions       $40,000                                        
   From AAA                 _–$40,000_    _$40,000_                         
   Totals                   _____0_____   _$40,000_                         
   
                                          NEW JERSEY 

                                          Nontaxable                        Capital Gain 
                          Distribution    amount           Dividend amount        amount 
   Total Distributions       $40,000                                                  
   From AAA                 _–$10,000_    _$10,000_                                   
                               $30,000                                                
   From E&P                    $30,000_                  _     $30,000_               
   Totals                   _____0_____     $10,000_           $30,000_               
   
   Federal AAA                 $50,000    New Jersey AAA                $0 
   Federal Balance of Basis    $10,000_   New Jersey Balance of Basis    $10,000_ 
   Federal Adjusted Basis      $60,000_   New Jersey Adjusted Basis       $10,000_ 
                              
                                          New Jersey E&P Account          $50,000 
  
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                        Income From S Corporations 

                         Understanding Income Tax 

 Example 2 
 A taxpayer is the sole shareholder of an S corporation. The S corporation’s earnings for the current year were 
 $10,000, and the federal adjusted basis of their stock at the end of the tax year is $70,000, which is comprised of: 

           Federal AAA                                     $60,000 
           Federal Balance of Basis                        $10,000 

 The New Jersey adjusted basis of their stock at the end of the tax year is $20,000, which is made up of: 

           New Jersey AAA                                  $10,000 
           New Jersey Balance of Basis                     $10,000 

 In addition, the balance of their New Jersey E&P Account is $50,000. 

 The S corporation made a distribution of $70,000 in May 2021, and a distribution of $30,000 in October 2021. 
 The S corporation had federal Earnings & Profits of $500. 

                                          FEDERAL 

                                          Nontaxable                   Dividend    Capital Gain 
                             Distribution                  amount      amount      amount 
  Total Distributions        $100,000                                                 
  From AAA                    –$60,000                     $60,000                    
                             $40,000                                                  
  From Federal E&P            –     $500                               $500           
                               $39,500                                                
  From Balance of Basis      –$10,000                      $10,000                    
                               $29,500                                                
  Gain from sale or exchange –$29,500                      ___________ __________  _$29,500_ 
  Totals                     ____0____                     _$70,000_   __$500___   _$29,500_ 
  
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                        Income From S Corporations 

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                                        NEW JERSEY 

                                          Nontaxable  Dividend    Capital Gain 
                             Distribution amount      amount      amount 
  Total Distributions        $100,000                                
  From AAA                    –$10,000    $10,000                    
                             $90,000                                 
  From federal E&P            –$50,000                $50,000        
                               $40,000                               
  From Balance of Basis      –$10,000     $10,000                    
                               $30,000                               
  Gain from sale or exchange –$30,000     ___________ __________  _$30,000_ 
  Totals                     ____0____    _$20,000_   _$50,000__  _$30,000_ 
                         
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                        Income From S Corporations 

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 Example 3 
 A taxpayer is the sole shareholder of an S corporation. The federal adjusted basis of their stock at the end of the 
 tax year is $180,000, which is comprised of: 

            Federal AAA                           $75,000 
            Federal PTI (Previously Taxed Income) $30,000 
            Federal Balance of Basis              $75,000 

 The New Jersey adjusted basis of their stock at the end of the tax year is $100,000, which is made up of: 

            New Jersey AAA                        $45,000 
            New Jersey Balance of Basis           $55,000 

 In addition, the balance of their New Jersey E&P account is $60,000. 

 The S corporation made distributions of $30,000 each in April and June 2021, and a distribution of $40,000 in 
 November 2021. 

                                               FEDERAL 

                                                  Nontaxable          Dividend     Capital Gain 
                           Distribution           amount              amount       amount 
   Total Distributions     $100,000                                                   
   From AAA                 –$75,000              _$75,000_                           
                           $25,000                                                    
   From Federal PTI         – $25,000             _$25,000_           ___________  ___________ 
   Totals                  ____0_____             $100,000            ____0_____   ____0_____ 

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                            Income From S Corporations 

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                                         NEW JERSEY 

                                          Nontaxable     Dividend      Capital Gain 
                             Distribution amount         amount        amount 
   Total Distributions       $100,000                                      
   From AAA                   –$45,000    _$45,000_                        
                             $55,000                                       
   From E&P                   – $55,000   ___________    _$55,000_     ___________ 
   Totals                    ____0_____   $45,000        _$55,000_     ____0_____ 

   Federal AAA                $0          New Jersey AAA               $0 
   Federal Balance of Basis    $75,000_   New Jersey Balance of Basis   $55,000_ 
   Federal Adjusted Basis      $75,000_   New Jersey Adjusted Basis     $55,000_ 
   Federal PTI               $5,000       New Jersey E&P Account      $5,000 
  
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                           Income From S Corporations 

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 Question S-10. How do I determine and report my gain or loss 

 from the disposition of my S corporation stock?  

 Determining Gain or Loss From Disposition of Stock 
 You determine your gain or loss from the sale of your shares of an S corporation by subtracting your New Jersey 
 adjusted basis from the amount you received for the sale. The simplest method for determining your New Jersey 
 adjusted basis in the stock at the time of the sale or other disposition is to add the following amounts: 

  •  Initial New Jersey basis; 

  •  Balance of your New Jersey AAA as of the date of the disposition of the stock; and 

  •  Any unused losses from previous years. 

 In addition, you must  make adjustments for any indebtedness  of the S corporation to  you  and/or  your 
 indebtedness to the corporation at the time of the disposition of your stock. 

 Before calculating the gain from the disposition of your S corporation stock, you must adjust your New Jersey 
 AAA based on the Schedule NJ-K-1, Form CBT‑100S that you received for the tax year in which the disposition 
 occurred. Or, if you did not receive a Schedule NJ-K-1, adjust your New Jersey accounts based on the information 
 on Reconciliation Worksheet B or Reconciliation Worksheet B – Liquidated that you completed from your federal 
 Schedule K-1. 

 If you disposed of some, but not all, of your stock, your New Jersey adjusted basis in the stock and your prior 
 year’s unused pro rata share of losses must be prorated based on the portion of stock you sold. 

 Reporting Gain or Loss From Disposition of Stock 
 The gain or loss from the disposition of S corporation stock is reported in the category “Net gains or income 
 from disposition of property.” Nonresidents must follow the resident shareholder procedures to determine the 
 gain or loss from disposition of their stock to be included as “Net gains or income from disposition of property” 
 everywhere. The gain or loss from a disposition of S corporation stock is not New Jersey source income for a 
 nonresident. 

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  Income From S Corporations 

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 If you report the disposition of stock as an installment sale for federal income tax purposes, you must report it 
 as an installment sale for New Jersey Income Tax purposes. An installment sale is a sale of property in which you 
 receive at least one payment after the tax year in which the sale occurs, according to the IRS. You must calculate 
 your New Jersey installment sale income under federal rules and procedures and use your New Jersey adjusted 
 basis and prior year unused pro rata share of losses. If the stock sale results in a loss for New Jersey purposes, 
 you report the full loss in the year the disposition occurred. 

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                            Income From S Corporations 

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 Question  S-11.  What  do  I  report  in  the  year  my  federal  S 

 corporation and my stock were completely liquidated? 

 New Jersey Treatment of Complete Liquidation of Federal S Corporation  
 Under Income Tax regulation 18:35-1.5(k)(2), a complete liquidation of an S corporation is deemed to occur in 
 the tax year when:  

  • All of the S corporation’s assets have been sold or deemed to have been sold, exchanged, disposed, or 
    distributed; and  

  • All of the S corporation’s stock has been sold, exchanged, or disposed.  

 Does the complete liquidation meet this criteria? If so, then the income, gains, losses, and New Jersey adjustments 
 from the S corporation’s operations, activities, and transactions prior  to the complete sale, exchange, or other 
 disposition of all the S corporation’s assets are reportable in the category “Net pro rata share of S corporation 
 income.” The S corporation’s income, gains, losses, and New Jersey adjustments derived from  the S corporation’s 
 complete sale, deemed sale, exchange, distribution, or other disposition of all of its assets, is reportable in the 
 category “Net gains or income from disposition of property.” 

 Electing S Corporation. If a New Jersey electing S corporation was completely liquidated, the corporation will 
 provide you with a Schedule NJ-K-1, Form CBT-100S that separately states your pro rata share of S corporation 
 income/loss and your pro rata share of total gain (loss) from the disposition of assets.  

 Non-electing S Corporation. If a non-electing federal S corporation was completely liquidated, you will have to 
 complete Reconciliation Worksheet B  –  Liquidated to determine the correct amount of pro rata share of S 
 corporation income/loss and pro rata share of total gain (loss) from a disposition of assets to report on your New 
 Jersey Income Tax return.  

 To complete Reconciliation Worksheet B – Liquidated, you will need to obtain the necessary information from 
 the corporation, including the corporation’s income/loss prior to liquidation, and the corporation’s income, gain, 
 or loss from liquidation of the corporation’s assets. 

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                         Income From S Corporations 

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 Instructions For Shareholder’s Reconciliation Worksheet B  – 

 Liquidated 

  Obtain the necessary information from the corporation, including its income/loss from liquidation of the 
  corporation’s assets, before completing Worksheet A – Liquidated. 

  S Corporation Information 
  Enter: 

  •      The name and federal identification number of the S corporation that issued the Schedule K-1, federal 
         Form 1120S that is being reconciled; 

  •      Your tax year;  

  •      The date the corporation’s assets were totally disposed; and  

  •      The date your stock was fully disposed. 

  Part I and Part II – Follow the Instructions for Shareholder’s Reconciliation Worksheet B. 

  Column A – For each line, enter the S corporation income, gains, losses, and New Jersey adjustments from 
  and applicable to the S corporation’s operations, activities, and transactions prior to the complete sale, 
  exchange, or other disposition of all of the S corporation’s assets. 
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  Column B – For each line, enter the income, gains, losses, and New Jersey adjustments derived from and 
  applicable to the S corporation’s sale, deemed sale, exchange, distribution, or other disposition of corporate 
  assets. 

 Connect With Us. 

 Email your State tax questions.  

 Visit a Regional Information Center.  

 Call (609) 292-6400;  

 Follow us: 

 The forms and amounts referred to in this Bulletin are those for Tax Year 2021. This document is designed to 
 provide guidance to taxpayers and is accurate as of the date issued.  

 Any reference in this publication to a spouse also refers to a spouse who entered into a valid same-sex marriage 
 in another state or foreign nation and a partner in a civil union (CU) recognized under New Jersey law. 

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