New Jersey State Business Income Tax / What kind of tax will you owe on New Jersey business income?

David Steingold for Nolo wrties: Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form. More particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states; corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.

Currently, four states (Nevada, South Dakota, Washington, and Wyoming) do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.

Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax.” This is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.

New Jersey taxes corporate income through its corporation business tax (CBT), but the state does not have any franchise or privilege tax generally applicable to businesses. Also, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.

In general terms, the CBT requires that a traditional (C-type) corporation pay the greater of:

• a graduated tax based on entire net income
• an alternative minimum assessment (AMA) based on gross profits; or
• an alternative minimum assessment (AMA) based on gross receipts.

The CBT rates on entire net income are as follows:

• entire net income $50,000 or less = 6.5% tax rate
• entire net income greater than $50,000 up to $100,000 = 7.5% tax rate; and
• entire net income greater than $100,000 = 9% tax rate.

Broadly speaking, the AMA based on gross profits and the AMA based on gross receipts apply only to multistate corporations whose business presence in New Jersey is limited to soliciting orders. More specifically, the two AMAs apply to corporations that choose to exempt themselves from the CBT’s graduated tax on corporate income under a federal law relating to state taxation of businesses, PL 86-272. If you have questions about the AMAs, you should consult with a New Jersey tax professional.

Putting aside the CBT’s income-based tax and AMAs, there is also a required minimum tax on New Jersey gross receipts for traditional corporations, as follows:

• gross receipts less than $100,000 = $500 tax
• gross receipts at least $100,000 but less than $250,000 = $750 tax
• gross receipts at least $250,000 but less than $500,000 = $1,000 tax
• gross receipts at least $500,000 but less than $1,000,000 = $1,500 tax; and
• gross receipts more than $1,000,000 = $2,000 tax.

The CBT also applies to New Jersey S corporations that are subject to federal taxation (due, for example, to built-in gains, excess passive income, or passive investment income). In such cases, as long as the S corporation files the proper New Jersey S corporation election form (CBT 2553), the CBT is based on the S corporation’s New Jersey gross receipts, as follows:

• gross receipts less than $100,000 = $375 tax
• gross receipts at least $100,000 but less than $250,000 = $562 tax
• gross receipts at least $250,000 but less than $500,000 = $750 tax
• gross receipts at least $500,000 but less than $1,000,000 = $1,125 tax; and
• gross receipts more than $1,000,000 = $1,500 tax.

For purposes of comparison, note that for 2012 New Jersey taxes personal income at marginal rates ranging from 1.40% to 8.97%.

Let’s briefly look at additional details for five of the most common forms of New Jersey business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations. New Jersey corporations are subject to the corporation business tax, which generally speaking is based on the corporation’s entire net income.

Example: For the 2012 tax year, your New Jersey corporation had entire net income of $300,000. Other things being equal, the corporation will owe New Jersey corporation business tax in the amount of $27,000 (9% of $300,000).

S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax (exceptions include cases where the S corporation has built-in gains, excess passive income, or passive investment income). Rather, taxable income from an S corporation is passed through to the individual shareholders, and each individual shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations usually are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.)

New Jersey does not recognize the federal S election; instead, as mentioned above, in addition to the federal “S” election form you must also file a New Jersey election form. Moreover, New Jersey S corporations that owe federal tax are also required to pay corporation business tax based on New Jersey gross receipts. Also, independently of any CBT due from the business itself, individual S corporation shareholders will owe tax on their share of the company’s net income.

Example: For the 2012 tax year, your New Jersey S corporation had net income of $250,000 and owed no federal taxes. The corporation will not owe any New Jersey corporation business tax. The corporation’s $250,000 of net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Limited Liability Companies (LLCs). Standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of New Jersey. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.

Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to New Jersey’s corporation business tax.

Example: For the 2012 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $250,000. The $250,000 in net income will be divvied up between you and your fellow LLC members, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Partnerships. Partnerships are pass-through entities and are not required to pay income tax to either the federal government or the State of New Jersey. Instead, income from the business is distributed to individual partners, who then pay federal and state taxes on the amount distributed to them

Example: For the 2012 tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.

Example: For the 2012 tax year, your sole proprietorship had net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return; the rate will vary depending on your overall net income for the year.

Note on Multistate Businesses and “Nexus”

Our primary focus here is on businesses operating solely in New Jersey. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in New Jersey, it may be subject to New Jersey taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.

When Your Broker 'Outs' You / Read this before you file your 2012 tax return if you sold stocks, mutual funds or exchange-traded funds in a taxable account

Laura Sanders for the Wall St. Journal writes:  Last year, did you sell stocks, mutual funds or exchange-traded funds held in a taxable account?  If so, read this before you file your 2012 tax return. This is the second year investment firms have had to report to the Internal Revenue Service the "cost basis" of certain assets sold by clients.

Reporting began in 2011 for stocks and in 2012 for mutual funds, many exchange-traded funds and dividend-reinvestment plans, or DRIPs. Some firms already have sent 1099-B forms to clients detailing information the firms are giving the IRS, and others will soon.

Cost basis refers to the price of acquiring an investment—the starting point for figuring tax after the asset is sold. This crucial subject often is confusing to taxpayers.

For example, say a woman bought 100 shares of a company at $50 a share in 2003 and then another 100 for $70 a share in 2007. Last year, she sold her stake for $85 a share.

The taxable gain on the two lots is very different. On the 2003 shares, it is $35 a share, or $3,500, while the gain is half that for the 2007 lot—$15 a share, or $1,500. Calculating cost basis is trickier if shares are bought with reinvested dividends, such as in a mutual fund or DRIP, or if stock splits or spinoffs cause adjustments.

That is a lot to keep straight over several years or decades. Nevertheless, investors must report the correct cost basis to the IRS after a sale.

In order to help honest taxpayers and discourage cheaters, Congress passed a law requiring brokers to file cost-basis report. Here is what investors need to know:

Investment firms must track and report cost basis for sales of stocks bought on or after Jan. 1, 2011. For mutual funds, many ETFs and DRIPs, the requirement applies to purchases since the start of 2012. Reporting for individual bonds—as opposed to bond funds—begins in 2014.

For example, if you bought a stock in 1978 and sold it last year, your brokerage firm needn't report the cost basis to the IRS. If you bought the stock in 2011 and sold in 2012, the firm does.

Note that even if your brokerage tells you the cost basis of an asset after a sale, it may not be telling the taxman. How can you tell? If Box 6b of the 1099-B form is checked, the firm is reporting cost basis to the IRS, says tax attorney Stevie Conlon of Wolters Kluwer Financial Services.

Be aware of nuances. If you reinvested dividends paid by a bond ETF or DRIP last year, then you bought new shares. If you then sold the entire investment in 2012, your investment firm must report the cost of the shares acquired last year—but not of the shares acquired before then.

If you sold shares at a loss 30 days before or after a dividend reinvestment, then you might trigger a "wash sale." That means you can't deduct some or all of the loss right away, Ms. Conlon says.

Becky Groves, director of government reporting at TD Ameritrade, says wash-sale questions provoked more calls to the brokerage firm last year than any other tax issue.

Firms are only required to track and report cost basis for investments within one account. So if an investor bought shares of a stock in his IRA within 30 days of selling shares of the same stock at a loss from a joint account, then it is up to him to tell the IRS about the wash sale.

Check 1099-Bs for mistakes. Robert Green, an accountant who heads GreenTraderTax, a tax preparer for more than 1,000 investors, urges taxpayers to double-check brokerage cost-basis reports against their own records.

"Often the 1099-Bs don't match trading logs," he says, especially for frequent traders. In some cases, he has seen income over- or understated by $10,000 or more. Problems arise most frequently with wash-sale reporting, he says.

Investors subject to the new reporting should think twice before filing early, says Mr. Green's partner, Darren Neuschwander. Last year, some clients received five corrected versions of the same 1099-B, he says. Early indications are there will be many corrected forms this year, too, he adds.

Remember: If your investment is held within an individual retirement account, Roth IRA, 401(k) or other tax-sheltered retirement plan, it isn't subject to cost-basis reporting.