N.J. Admin. Code § 18:35-2.7
"Deduction percentage" means a fraction whose numerator is the qualified receipts of the practice location or qualified practice location and whose denominator is the qualified practice location's gross receipts from services. The calculation should be rounded to three decimal places.
"Eligible taxpayer" means a taxpayer, as defined by 54A:1-2.1 that owns a qualified practice.
"Health Enterprise Zone" or "HEZ" means a municipality deemed a State-designated underserved area and designated as such by the Department of Health. The current list of Health Enterprise Zones is available at: http://www.state.nj.us/health/fhs/professional/workforce.shtml#psa.
"Health Enterprise Zone deduction" is the amount calculated pursuant to the methodology set forth in (c) below and which is deducted from an eligible taxpayer's gross income.
"Primary care" means the practice of family medicine, general internal medicine, general pediatrics, general obstetrics, gynecology, and any other areas of medicine which the Commissioner of Health and Senior Services may define as primary care. Primary care also includes the practice of general dentistry and pedodontics, as well as the professions of nurse-practitioner, certified nurse-midwife, and physician assistant. See 18A:71C-32.
"Qualified practice" means a practice location in New Jersey at which 50 percent or more of the total amounts received for services at that practice location for the taxable year are qualified receipts and 50 percent or more of the patients, whose services are compensated by qualified receipts, reside in a Health Enterprise Zone.
"Qualified receipts" means amounts received for services from the Medicaid program, including amounts received from managed care organizations under contract with the Medicaid program, the Family Care Health Coverage Program, and the Children's Health Care Coverage Program for providing health care services to eligible program recipients.
Example 1
XY Medical Services, Inc., a New Jersey S corporation, is located in a Health Enterprise Zone. It is owned by Dr. Smith and Dr. Jones who are the sole shareholders. The practice also employs two other medical doctors and two physician assistants and, on occasion, brings in a doctor who is a medical specialist.
During the calendar year, the practice's gross receipts were $ 900,000, of which $ 600,000 were qualified receipts from the New Jersey Medicaid program for providing services to qualified recipients. The S corporation's net income for the year was $ 240,000.
The S corporation, XY Medical Services, Inc., calculates its HEZ deduction percentage as follows:
qualified receipts $ 600,000 = 66.667%
gross receipts $ 900,000
XY Medical Services, Inc. then calculates the total HEZ deduction allowed for the practice, which is then allocated to its shareholders. XY Medical Services, Inc. calculates its HEZ deduction as follows:
HEZ Deduction percentage, 66.667% x New Jersey S Corp Net Income, $ 240,000 = $ 160,000
The two shareholders, Drs. Smith and Jones, each own 50 percent of the practice. Their NJ-K-1s, provided by the practice, reflect net pro rata share of S corporation income of $ 120,000 each and an HEZ deduction of $ 80,000.
Drs. Smith and Jones each report on their respective New Jersey gross income tax returns net pro rata share of S corporation income of $ 120,000 and claim an HEZ deduction of $ 80,000 as reflected on their respective NJ-K-1s.
The physicians and physicians' assistants employed by the practice are not eligible for a deduction because they receive wages and not net income from the qualified practice.
Unless the medical specialist that XY Medical Services, Inc. brings into its location on a case-by-case basis maintains a qualified practice of taxpayer's own, taxpayer does not qualify for an HEZ deduction.
Example 2
Dr. Johnson has a medical practice, organized as a single member LLC with two locations. Location one is within five miles of an HEZ, and location two is neither in an HEZ nor within five miles of an HEZ.
During the calendar year, Dr. Johnson's practice reports the following:
-- Location one's gross receipts are $ 200,000. Its qualified receipts are $ 125,000.
-- Sixty percent of location one's qualified receipts, $ 75,000, are from patients living in an HEZ.
-- Location one is a qualified practice because at least 50 percent of the gross receipts were qualified receipts and at least 50 percent of the qualified receipts were from patients living in an HEZ.
-- Location one's HEZ deduction percentage would be 62.5 percent calculated by dividing the location's qualified receipts, $ 125,000 by the location's gross receipts, $ 200,000.
-- Location two's gross receipts are $ 300,000. Its qualified receipts are $ 130,000.
-- Twenty-five percent of location two's qualified receipts, $ 32,500, are from patients living in an HEZ.
-- Location two is not a qualified practice because it is neither in an HEZ nor within five miles of an HEZ.
-- Net profits from operations for the entire business are $ 180,000. Location one's net profits from operations are $ 60,000 and location two's net profits from operations are $ 120,000.
During the calendar year, Dr. Johnson, a New Jersey resident, reports $ 180,000 as net profits from business on his or her NJ-1040 return. Dr. Johnson is entitled to an HEZ deduction for location one of $ 37,500, calculated as follows:
| Net profits from the | ||||
| HEZ deduction percentage | x | qualified location | = | deduction |
| 62.5% | x | $ 60,000 | = | $ 37,500 |
Dr. Johnson is not entitled to an HEZ deduction for location two because it is not a qualifying practice.
In accordance with 18:35-2.7(d), businesses and practices that have more than one location must maintain separate books and records for each location, so that the deduction percentage and net profits from the individual locations can be determined. These separate books and records must be available to the Division of Taxation for audit and verification of the HEZ deduction.
Example 3
ABC Medical, Inc. has two locations, location one is in an HEZ and location two is neither in nor within five miles of an HEZ. Dr. L is the sole shareholder of ABC Medical, Inc.
During the calendar year, ABC Medical, Inc. reported the following:
-- Location one's gross receipts were $ 400,000. Its qualified receipts were $ 325,000.
-- Thirty percent of location one's qualified receipts, $ 97,500, were from patients living in an HEZ.
-- Location one qualifies for an HEZ deduction even though 50 percent of its qualified receipts were not from patients living in an HEZ because location one is located in an HEZ.
-- Location one's net profits from operations were $ 45,000.
-- Location one's HEZ deduction percentage is 81.25 percent calculated by dividing the location's qualified receipts, $ 325,000, by its gross receipts, $ 400,000.
-- Location one's HEZ deduction is $ 36,563, calculated by multiplying location one's net profits, $ 45,000, times its HEZ deduction percentage, 81.25 percent.
-- Location two's gross receipts were $ 500,000. Its qualified receipts were $ 175,000 and 25 percent of location two's qualified receipts, $ 43,750, were from patients living in an HEZ.
-- Location two is not a qualified practice because it is neither in nor within five miles of an HEZ.
-- Location two's net profits from operations were $ 180,000.
-- ABC Medical, Inc., an S corporation, during the calendar year, reports an HEZ deduction of $ 36,563 for location one. This amount is reflected on the CBT-100S K1 issued to Dr. L for the calendar year.
* Net profits from operations for the entire corporation were $ 225,500.
During the calendar year, Dr. L, a nonresident, reports $ 225,500 as net pro rata share of S corporation income on his or her NJ-1040NR return. Dr. L will also claim an HEZ deduction of $ 36,563, as reflected on his or her NJ-K-1 from ABC Medical, Inc.
In accordance with 18:35-2.7(d), businesses and practices that have more than one location must maintain separate books and records for each location, so that the deduction percentage and net profits from the individual locations can be determined. These separate books and records must be available to the Division of Taxation for audit and verification of the HEZ deduction.
Example 4
Dr. E is associated with three separate qualified dental practices. He or she is a member (partner) in HIJ Associates, LLC and KLM Associates, LLC. He or she is also a shareholder of NOP Orthodontics, Inc., a New Jersey S corporation.
During the calendar year, Dr. E received the following information on his or her K-1s from the three dental practices:
| HIJ Associates, LLC | |
| Distributive Share of Partnership Income | $ 225,000 |
| HEZ Deduction | $ 73,253 |
| KLM Associates, LLC | |
| Distributive Share of Partnership | |
| Income/loss | ( $ 23,500) |
| HEZ Deduction | $0 |
| NOP Orthodontics, Inc. | |
| Net Pro Rata Share of S Corporation Income | $ 86,000 |
| HEZ Deduction | $ 22,747 |
During the calendar year, Dr. E, a New Jersey resident, reports the following items of income on his or her NJ-1040 return:
| Distributive Share of Partnership Income | Supporting | |
| Partnership Income | Detail | Total |
| HIJ Associates | $ 225,000 | |
| KLM Associates | ($ 23,500) | $ 201,500 |
| Net Pro Rata Share of S | ||
| Corporation Income | ||
| NOP Orthodontics, Inc. | $ 86,000 | $ 86,000 |
| HEZ Deduction | ||
| HIJ Associates | $ 73,253 | |
| KLM Associates | $0 | |
| NOP Orthodontics, Inc. | $ 22,747 | $ 96,000 |
Dr. E is not entitled to an HEZ deduction for KLM Associates because he or she had no net taxable income from the practice. He or she had a loss.
Example 5
Dr. J has a practice with two locations. Location one is located within an HEZ and location two is located within five miles of an HEZ. During the calendar year, Dr. J's practice reports the following:
-- Location one's gross receipts were $ 300,000. Its qualified receipts were $ 110,000.
-- Location one qualifies for an HEZ deduction because it is located within an HEZ.
-- Location one's HEZ deduction percentage is 36.667 percent, calculated by dividing its qualified receipts, $ 110,000, by its gross receipts, $ 300,000.
-- Location one's net profits from operations were $ 85,000.
-- Location one's HEZ deduction is $ 31,167, calculated by multiplying location one's net profits, $ 85,000, times its HEZ deduction percentage, 36.667 percent.
-- Location two's gross receipts were $ 400,000, its qualified receipts were $ 300,000, and 60 percent of location two's qualified receipts, $ 180,000, were from patients living in an HEZ.
-- Location two also qualifies for an HEZ deduction because it meets all the criteria to be a qualified practice.
-- Location two's HEZ deduction percentage is 75 percent calculated by dividing its qualified receipts, $ 300,000, by its gross receipts, $ 400,000.
-- Location two's net profits from operations were $ 110,000.
-- Location two's HEZ deduction is $ 82,500, calculated by multiplying location two's net profits, $ 110,000, times its HEZ deduction percentage, 75 percent.
-- Net profits from operations for Dr. J's entire practice were $ 195,000.
During the calendar year, Dr. J, a New Jersey resident, will report on his or her NJ-1040 $ 195,000 as net profits from business, $ 85,000 from location one and $ 110,000 from location two. Dr. J can claim a $ 113,667 HEZ deduction, $ 31,167 from location one and $ 82,500 from location two. Dr. J must attach a schedule to his or her return showing how he or she arrived at his or her HEZ deduction.
In accordance with 18:35-2.7(d), businesses or practices that have more than one location must maintain separate books and records for each location, so that the deduction percentage and net profits from the individual locations can be determined. These separate books and records must be available to the Division of Taxation for audit and verification of the HEZ deduction.
N.J. Admin. Code § 18:35-2.7