CSG Law Alert: New Law Ends COVID-19 Statute of Limitations Suspensions & Implements Other Changes

On December 22, 2022, Governor Murphy signed into law Bill A-4295/S-2876 (the “Act”). The Act (1) ends tax-related COVID-19 statute of limitation suspensions; (2) adopts the Multistate Tax Commission’s model statute for implementing adjustments resulting from the federal partnership audit regime; and (3) removes the requirement for corporations that are federally recognized as S Corporations to have to separately elect S Corporation status under New Jersey law.

I. COVID-19 Statute of Limitations

Pursuant to the 2020 COVID-19 Fiscal Mitigation Act, enacted on April 14, 2020, New Jersey suspended the statute of limitations (“SOL”) on tax assessments and also suspended the requirement that New Jersey pay interest to taxpayers on tax overpayments. The SOL suspension for tax assessments was set to end 90 days following the end of the New Jersey state of emergency declared by the Governor in Executive Order No. 103 of 2020, or any extension thereof. The suspension related to interest paid on overpayments was set to end on the later of (a) 90 days after the end of the state of emergency, or any extension thereof; or (b) six months after the return is filed. To date, the state of emergency has not been lifted.

The SOL for taxpayers to apply for a refund on taxes paid to New Jersey was suspended by Executive Order 170, but this suspension was set to end 90 days following the end of the public health emergency, not the state of emergency. The public health emergency ended on June 4, 2021, pursuant to Executive Order No. 244, but the SOL for taxpayers to file a claim for a refund or credit was extended until April 1, 2022. This meant that taxpayers could be assessed additional taxes on tax returns for which they were no longer able to claim a refund or credit or receive interest on overpayments.

The Act ends the SOL suspension for assessments and interest on overpayments as of December 22, 2022. Any assessments made on or after that date that otherwise would have been barred by the applicable SOL but for the suspension will be voided, and any collected amounts will be refunded to the taxpayer.

II. Federal Partnership Audit Regime Adaptation

The Bipartisan Budget Act of 2015 (the “BBA”) created a federal centralized partnership audit regime wherein the Internal Revenue Service (the “IRS”) performs tax adjustments at the partnership level (unless an eligible partnership timely opts out) beginning with returns filed for tax year 2018. The Act amends portions of the New Jersey Gross Income Tax Act and the Corporation Business Tax Act to adapt the BBA’s audit regime to state law by adopting a model statute drafted by the Multistate Tax Commission.

Some of the Act’s most critical provisions relate to reporting requirements arising from a federal partnership-level audit. Reporting timelines commence at the “final determination date” of a “federal adjustment.” A federal adjustment is defined as “any change to an item or amount determined under the Internal Revenue Code” that affects a taxpayer’s New Jersey gross income or corporation business taxes. These changes can arise from an IRS audit or from the partnership filing an amended tax return, refund claim, or administrative adjustment request. For federal adjustments arising from IRS audits or other actions (including with respect to composite and combined return filings), the final determination date is defined as the first day on which all federal adjustments have been finally determined, including after all rights of appeal have been waived or exhausted. For federal adjustments arising from a federal amended return, refund claim, or administrative adjustment request, the final determination date is the date that such return or request is filed with the IRS. A federal adjustment becomes a “final federal adjustment” after the final determination date has passed.

Unless an exception applies, the state partnership representative must perform the following actions within 90 days of the final determination date of federal adjustments resulting from a partnership-level audit or administrative adjustment request:

1. File the final federal adjustment report to the Director;
2. Notify direct partners of their distributive share of the final federal adjustment; and
3. File an amended New Jersey Form 1065 and/or composite return, paying the amounts that would have been due if the returns were originally filed with the final federal adjustments properly reported.

Within 180 days of the final determination date, each direct partner of the partnership must file its federal adjustments report with the Division of Taxation to report its distributive share of partnership adjustments and pay any additional taxes, penalties and interest. Alternatively, the partnership can elect to make payments, calculated using statutory formulas, on behalf of its partners (a “Partnership Pays” election). This election must be made within 90 days of the final determination date and the payment must still be made within 180 days of the final determination date.

In addition to the procedures highlighted above, the Act adds comprehensive provisions addressing items such as the statute of limitations for Division assessments after a final federal adjustment is made, state partnership representative elections, allocation and apportionment for federal adjustments, and rules for tiered partnerships, to adapt state procedure to the federal regime. These provisions take effect immediately and apply to any federal adjustments to a taxpayer’s income made on or after January 1, 2020.

III. New Jersey S Corporation Elections

Previously, a corporation that elected to be taxed as an S Corporation at the federal level had to make a separate S election to be taxed as an S Corporation by New Jersey. The Act ends this requirement, providing that a corporation that has made a valid federal S election will, by default, be recognized as an S Corporation for New Jersey purposes unless the relevant shareholders unanimously elect to be treated otherwise. This critical change applies to tax years and privilege periods beginning after December 22, 2022.

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