New Jersey Administrative Code
Title 18 - TREASURY - TAXATION
Chapter 35 - NEW JERSEY GROSS INCOME TAX
Subchapter 1 - GROSS INCOME-CATEGORIES AND CALCULATION
Section 18:35-1.3 - Partnerships and partners

(a) The following words and terms, when used in this section, shall have the following meanings:

(b) Partners, not partnerships, are subject to tax. Taxpayer partners shall be subject to gross income tax on their distributive share of partnership income, whether or not distributed. Such income shall be reported as distributive share of partnership income, pursuant to 54A:5-1.k, regardless of the character or category of the income derived by the partnership.

(c) Partnership income or loss reported on Form NJ-1065 shall be comprised of all income or loss received, derived, or incurred by the partnership and all expenses allowable under 18:35-1.1(d) that are not prohibited or limited under the Gross Income Tax Act, in accordance with the partnership's Federal method of accounting and reported in the same tax period as reported Federally.

(d) A partner's distributive share of partnership income or loss shall be comprised of the following:

(e) Partners who are taxpayers for gross income tax purposes shall report their partnership income according to the following:

(f) Partnership filing requirements are as follows:

(g) Partner filing requirements are as follows:

(h) The provisions of this section are illustrated by the following examples:

Example 1:

A partnership reported the following income on its Federal Schedule K (Form 1065):

The partnership in completing its NJ-1065 will determine partnership income as follows:

The partnership has two full year resident partners who are not members of any other partnerships. Partner A has a 60 percent interest and partner B has a 40 percent interest. They will report their distributive shares of partnership income on their NJ-1040s as follows:

Example 2:

A partnership reported the following income on its Federal Schedule K (Form 1065):

The partnership also incurred the following expenses as reported for Federal income tax purposes:

The partnership in completing its NJ-1065 will determine partnership income as follows:

The partnership has two full year resident partners who are not members of any other partnerships. Partner A has a 2/3 interest and partner B has a 1/3 interest. Partner A also has the following unreimbursed business expenses: automobile $ 800.00 and telephone $ 200.00. These ordinary business expenses were incurred in the conduct of the partnership's business and are deductible. The partners will report their distributive shares of partnership income on their NJ-1040s as follows:

Example 3:

* Partner A received guaranteed payments of $ 20,000 for special services rendered.

Partner B received no guaranteed payments.

Partner C is retired and received guaranteed payments of $10,000 pursuant to the partnership's pension plan.

The partnership in completing its NJ-1065 will determine partnership income as follows:

**Guaranteed payments are allocated to partners according to the partnership agreement.

Partners A and B are full year residents who each have a 50 percent interest in the profit and loss of the partnership. Partners A and B will each report 50 percent of the partnership income (excluding guaranteed payments) on their NJ-1040s as follows:

Retired partner C has no distributive share of partnership income to report on his or her NJ-1040; however, he or she must report pension income in the amount of $ 10,000.

Example 4a:

A partnership makes contributions to a qualified pension plan under the Internal Revenue Code on behalf of its employees for $ 4,500. The partnership may deduct the $ 4,500 as a business expense.

Example 4b:

Partner X elects to contribute $ 3,000 to his or her account in the qualified Keogh plan established by the partnership. Partner Y elects not to make a contribution to the plan. The partnership must include the $ 3,000 contribution made by partner X in his or her distributive share of partnership income in the taxable year the contribution was made. Partner X may not deduct his or her $ 3,000 contribution as an ordinary business expense. When subsequently withdrawn, partner X's previously taxed contribution will not be subject to tax.

Partners X and Y each elect to make a contribution of $ 5,000 to the partnership's 401(k) plan. They may deduct their contributions to the extent allowed under the Internal Revenue Code in determining their distributive share of partnership income.

The partnership reported the following income on its Federal Schedule K (Form 1065):

* The ordinary income is net of a $ 15,000 contribution made by the partnership to a qualified pension plan on behalf of its employees. The partnership in completing its NJ-1065 will determine partnership

The partnership has two full year resident partners who are not members of any other partnerships. They each have an equal interest in the sharing of profit or loss. They will report their distributive shares of partnership income on their NJ-1040s as follows:

401(k) contributions made by the partners are deductible to the extent allowed under the Internal Revenue Code. Keogh plan contributions made by the partners are not deductible.

Example 5a:

A partnership that is in the business of manufacturing consumer products reported the following on its Federal Schedule K (Form 1065):

The investment interest expense resulted from a loan to finance improvement of machinery and equipment used in the business and meets the ordinary business expense standard.

The partnership in completing its NJ-1065 will determine partnership income as follows:

The partnership has two full year resident partners. Partner A and Partner B have equal shares. The partners will report their distributive share of partnership income on their NJ-1040s as follows:

Example 5b:

A law firm partnership earned $ 600,000 of ordinary income during the calendar year. Partner A is financing 50 percent of his or her capital contribution to the partnership with a loan from the partnership. The interest on this loan is $ 4,000. Partner B's capital contribution came entirely from his or her own funds. The partnership in completing its NJ-1065 will determine partnership income as follows:

Partner A can deduct the $ 4,000 interest expense since the interest resulted from a loan used to buy equity in the partnership and will report $ 298,000 as distributive share of partnership income. Partner B will report $ 302,000 as distributive share of partnership income on the NJ-1040.

Example 5c:

A rental real estate partnership reported the following on its Federal Schedule K (Form 1065):

The investment interest expense of $ 20,000 resulted from the partnership financing a $ 300,000 distribution to the partners with a bank loan that required the partnership to pledge one of its buildings as collateral.

The partnership in completing its NJ-1065 will determine partnership income as follows:

The investment interest expense cannot be deducted for New Jersey gross income tax purposes since the transaction does not meet the ordinary business expense standard. Investment interest expense that flows out of the partnership to a partner may never be deducted by the individual partner as an ordinary business expense for New Jersey gross income tax purposes.

The partnership has two full year resident partners. Partner A has a 2/3 interest and Partner B has a 1/3 interest. The partners will report their distributive shares of partnership income on their NJ-1040s as follows:

Example 6:

An individual taxpayer was a partner in three partnerships. His or her distributive share of partnership income or loss from each of the partnerships was as follows:

The taxpayer must net all his or her distributive shares of partnership income and report the total in the category distributive share of partnership income.

In addition to being a partner in these partnerships, the taxpayer was also a shareholder in an S corporation and a proprietor of a small business. His or her other business activities resulted in the following:

The taxpayer cannot combine his or her net pro rata share of S corporation income of $ 3,000 with his or her gain from her total distributive share of partnership income of $ 16,000 or his or her loss from her sole proprietorship of $ 2,000. Each category of income must be reported separately.

The taxpayer will report the following income on his or her NJ-1040:

The taxpayer must report a zero in category net profits from business on his or her NJ-1040. Under the Gross Income Tax Act, a taxpayer may not offset losses in one category of income against income or gain in another category.

Example 7:

Partnership DEF is a partner in Partnership XYZ. As a partner, Partnership DEF received a schedule NJK-1 from Partnership XYZ that reported the following income:

In addition to its income from XYZ, Partnership DEF generated the following income during the calendar year:

Partnership DEF completed the New Jersey Business Allocation Schedule (Form NJ-NR-A) and determined its percentage of partnership income allocated to New Jersey to be 10 percent. In determining its income allocation percentage, Partnership DEF includes neither the distributive share of partnership income nor the allocation factors of Partnership XYZ.

Partnership DEF will report its distributive share of partnership income as follows:

Partnership DEF cannot reallocate the income it received from Partnership XYZ.

Partnership DEF has two partners who share equally in profits and losses. Partner L is a full year resident of New Jersey and Partner M is a full year resident of Pennsylvania. Partnership DEF will report the following distributive share of partnership income on each of its partner's schedules NJK-1:

The partners will report their distributive share of partnership income on their individual returns as follows:

As a resident, Partner L is subject to tax on his or her entire distributive share of partnership income, regardless of where it is sourced. Partner M, as a nonresident, is only subject to tax on his or her distributive share of partnership income that is sourced to New Jersey.

Example 8a:

A partner's taxable year ends on December 31, while the partnership's fiscal year ends on June 30. The partner is to report the partner's distributive share of partnership income from the partnership's taxable year that ended June 30 on the partner's NJ-1040.

Example 8b:

A partner's taxable year ends on December 31, while the partnership's fiscal year ended on August 31. The partnership changed to a calendar year partnership during the year. In addition to the partnership filing a fiscal year return covering the period from September 1 of the prior year to August 31 of the current year, the partnership must also file a short year return covering the period from September 1 of the current year to December 31 of the current year.

The partnership reported the following distributive share of partnership income on the partner's schedules NJK-1:

NJK-1 (September 1 of the prior year-August 31 of the current year) $ 100,000

NJK-1 (September 1 of the current year-December of the current year) $ 30,000

The partner, who is not a member of any other partnership and who is a full year resident of New Jersey, is to report $ 130,000 as distributive share of partnership income on taxpayer's NJ-1040. The partner has to report the total from both NJK-1s on his or her NJ-1040 since the prior and current taxable years of the partnership ended within the partner's taxable year.

Example 9:

Partnership ABC carried on business both within and outside of New Jersey. By completing the New Jersey Business Allocation Schedule (Form NJ-1040-NR-A), Partnership ABC determined that 60 percent of its partnership income is sourced to New Jersey.

Partnership ABC reported the following income on its Federal Schedule K (Form 1065):

The partnership in completing its NJ-1065 will determine partnership income as follows:

Partnership ABC has partnership income from all sources of $ 60,000 and partnership income from New Jersey sources of $ 36,000 ($ 60,000 x 60%).

Partnership ABC has three partners who share equally in profits and losses. They are not members of any other partnerships. Partners A and B are each full year resident partners and Partner C is a full year resident of New York. Partnership ABC will report the following distributive shares of partnership income on its partner's schedules NJK-1.

The partners will report their distributive share of partnership income on their individual returns as follows:

Partners A and B, as residents, are subject to tax on their entire distributive shares of partnership income, regardless of where it is sourced. Partner C, as a nonresident, is only subject to tax on his or her distributive share of partnership income that is sourced to New Jersey.

Example 10a:

Partnership ABC is a calendar year partnership that reported a distributive share of partnership income to Partner A of $ 12,000. Partnership ABC's income is all sourced to New Jersey.

Partner A was a resident of New Jersey through September 30 and became a nonresident of New Jersey on October 1.

Partner A is required to file a part-year New Jersey resident return for the period from January 1 through September 30 and a part-year New Jersey nonresident return for the remaining three months of the calendar year.

Partner A will report a distributive share of ABC's partnership income in the amount of $ 8,975 on his or her part-year New Jersey resident return.

$ 12,000 x (273/365) = $ 8,975

Partner A will report a distributive share of ABC's partnership income in the amount of $3,025 on his or her part-year New Jersey nonresident return.

$ 12,000 x (92/365) = $ 3,025

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 10b:

Partnership ABC is a fiscal year partnership that has a year end of November 30. Partnership ABC reported a distributive share of partnership income to Partner A of $ 12,000. Partnership ABC's income is all sourced to New Jersey.

Partner A was a resident of New Jersey through September 30 and became a nonresident of New Jersey on October 1.

Partner A is required to file a part-year New Jersey resident return for the period from January 1 through September 30 and a part-year New Jersey nonresident return for the remaining three months of the calendar year.

Partner A will report a distributive share of ABC's partnership income in the amount of $ 9,995 on his or her part-year New Jersey resident return. Partner A must multiply his or her entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that Partner A was a New Jersey resident bears to 365. Partnership ABC's fiscal year began on December 1 of the prior year and Partner A was a resident of New Jersey from December 1 of the prior year through September 30 of the current year.

$ 12,000 x (304/365) = $ 9,995

Partner A will report a distributive share of ABC's partnership income in the amount of $ 2,005 on his or her part-year New Jersey nonresident return. Partner A must multiply his or her entire distributive share of partnership income (all sourced to New Jersey) by the percentage which the number of days of the partnership's fiscal year that he or she was not a New Jersey resident bears to 365. Partner A was not a resident of New Jersey as of October 1 and Partnership's ABC fiscal year ended on November 30.

$ 12,000 x (61/365) = $ 9,995

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 10c:

Partnership ABC is a fiscal year partnership that has a year end of November 30. Partnership ABC reported a distributive share of partnership income to Partner A of $ 12,000. Partnership ABC determined that 20 percent of its income is sourced to New Jersey.

Partner A was a resident of New Jersey through September 30 and became a nonresident on October 1.

Partner A is required to file a part-year New Jersey resident return for the period from January 1 through September 30 and a part-year New Jersey nonresident return for the remaining three months of the calendar year.

Partner A will report a distributive share of ABC's partnership income in the amount of $ 9,995 on his or her part-year New Jersey resident return. Partner A must multiply his or her entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that Partner A was a New Jersey resident bears to 365. Partnership ABC's fiscal year began on December 1 of the prior year and Partner A was a resident of New Jersey from December 1 of the prior year through September 30 of the current year.

$ 12,000 x (304/365) = $ 9,995

Partner A will report a distributive share of partnership income from everywhere of $ 2,005 and from New Jersey sources of $ 401.00 on his or her part-year nonresident New Jersey return. Partner A must multiply his or her entire distributive share of partnership income by the percentage which the number of days of the partnership's fiscal year that partner A was a nonresident of New Jersey bears to 365.

Partner A was nonresident of New Jersey as of October 1 and partnership ABC's fiscal year ended on November 30. Partner A must then multiply his or her distributive share of partnership income for the nonresident period, $ 2,005, by the ABC's New Jersey allocation percentage, 20 percent, to determine the amount of income sourced to New Jersey for his or her period of nonresidency.

$ 12,000 x (61/365) = $ 2,005 partnership income from everywhere, Column A

$ 2,005 x 20% = $ 401.00 partnership income sourced to New Jersey, Column B

Partner A must attach a schedule to both his or her part-year NJ-1040 and part-year NJ-1040-NR showing the calculations used to determine the amounts reported on each return.

Example 11:

A partnership has two partners, X and Y, that share profit and loss equally. Partner X is a resident partner and Partner Y is a nonresident partner. On December 31, Partners X and Y completely liquidate the partnership. The partnership had current year ordinary income of $ 3,800, interest income of $ 160.00, dividend income of $ 40.00, and a gain from the sale of partnership assets, as a result of the complete liquidation, of $ 15,000.

The partnership in completing its NJ-1065 will determine its distributive share of partnership income as follows:

By completing the New Jersey Business Allocation Schedule (Form NJ-1040-NR-A), the partnership determined that 75 percent of its partnership income is sourced to New Jersey. Therefore, $ 3,000 of partnership income is sourced to New Jersey.

The partnership, as a result of the complete liquidation, sold all of its assets, which included two parcels of real property. The parcel in New Jersey sold at a gain of $ 7,000 and the parcel in Pennsylvania sold at a gain of $ 4,000. Additionally, the partnership sold equipment and other tangible assets at a gain of $ 3,000 of which $ 1,800 was sourced to New Jersey. Finally, the partnership sold its intangible assets at a gain of $ 1,000. The average of the partnership's last three years business allocations is 80 percent; therefore, $ 800.00 of the gain from the sale of intangible assets is sourced to New Jersey.

The partnership in completing its NJ-1065 will determine its gain from a complete liquidation as follows:

The partnership will report on its NJ-1065 its distributive share of partnership income of $ 4,000, of which $ 3,000 is sourced to New Jersey, and a gain from its complete liquidation of $ 15,000 of which $ 9,600 is sourced to New Jersey. The partnership will pro-rate the income accordingly and report each partner's share on their respective Schedule NJK-1s as follows:

Additionally, Partner X had a gain of $ 5,000 on the disposition of his or her partnership interest and Partner Y had a loss of $ 2,000 on the disposition of his or her partnership interest.

The partners will report the following on their individual returns:

Since the partnership had a complete liquidation, Partner X will report $ 2,000 in the distributive share of partnership income category and $ 12,500 in the net gains from disposition of property category.

Partner Y will report $ 2,000 in the distributive share of partnership income category and $ 5,500 in the net gains from disposition of property category in the everywhere column and $ 1,500 in the distributive share of partnership income category and $ 4,800 in the net gains from disposition of property category in the New Jersey source column. The gain or loss from the sale of a partnership interest is from an intangible not employed in a trade or business, therefore, not subject to tax for a nonresident.

Example 12:

Partners A and B who are both residents of New Jersey share profit and loss equally. On August 31, Partners A and B sold their rental building located in New Jersey at a gain of $ 16,000. The partnership continued operating their other business activity, which generated ordinary income of $ 20,000.

The partnership in completing its NJ-1065 will determine partnership income as follows:

Since the partnership did not have a complete liquidation, the partnership will include the gain from the sale of its rental property in partnership income.

The partners will report the following on their individual tax returns: