Sales Tax in New Jersey: What You Need To Know

sales-tax-in-new-jersey

By: Cassandra Bartole

For most New Jersey Business owners, New Jersey assesses a tax on sales of most tangible personal property, specified digital products, and certain services unless specifically exempt under New Jersey law.  This article will cover the most important aspects of New Jersey’s sales tax rules:

What Items are Taxable in New Jersey?

Most things that we purchase have a sales tax. In New Jersey, the sales tax rate is 6.625%. You may notice that sales tax is being charged at the bottom of your receipt the next time you go shopping.  Items that are subject to sales tax in New Jersey are physical items such as automobiles, furniture, fixtures, and meals bought at restaurants. 

Are Services Subject to Sales Tax in NJ?

In New Jersey, there are also many services that are subject to sales tax. These would include primarily both maintenance services and repair services including lawn maintenance, auto repairs, snow removal, and telecommunications. 

What Items Are Not Taxed in New Jersey?

Although there are many taxable items in New Jersey, there are also many items that are tax exempt. These items include unprepared food, clothing, some professional and personal services, and real estate sales, to name a few. 

Sales Tax on Labor

For contractors, if the work they have done is an exempt capital improvement (such as installing a new heating system or installing new kitchen cabinets) they do not charge sales tax on the labor portion of the bill, but if the work is repairs or maintenance then the contractor charges sales tax on the labor portion of the bill.

In some situations, the difference between a repair and a capital improvement is the extent of the work that is done. For example, replacing a few loose bath tiles or a portion of a leaky roof is a repair to the existing property. However, replacing all the tiles or the entire roof with an upgraded or improved materials would be an exempt capital improvement.

Sales Tax on Labor outside of New Jersey 

For contactors where sale and installation outside of New Jersey occur, they do not collect New Jersey sales tax on the installation charges.

Sales Tax for Customers Outside of New Jersey

For most sales tax is due in the state where the customer takes possession or delivery of the items they purchased. According to the state of New Jersey, any tangible property serviced or repaired in New Jersey and delivered to the purchaser outside of New Jersey is exempt from New Jersey sales tax.  If a business is located outside of New Jersey but makes sales within New Jersey they are required to register with New Jersey and charge/collect New Jersey sales tax on taxable items delivered to customers in the state of New Jersey. 

New Jersey Sales Tax on Online Purchases 

The 6.625% tax rate for sales tax in New Jersey also applies for online sales.

Additional Resources

The above article is meant to provide guidance on sales tax but is certainly not inclusive of all aspects of New Jersey sale tax. We strongly encourage our readers to read more around New Jersey sales tax through the following publications:

https://www.state.nj.us/treasury/taxation/su_over.shtml

https://www.state.nj.us/treasury/taxation/pdf/pubs/sales/su4.pdf

https://www.state.nj.us/treasury/taxation/pdf/pubs/sales/su2.pdf

https://www.state.nj.us/treasury/taxation/pdf/pubs/sales/anj10.pdf

Rental Property Tax Deductions

rental-property-tax-deductions

What are the basic rules for rental properties?

Deciding to invest in a rental property is a big commitment, and one that will also be a big change to your tax forms. Here are some of the basics you should know if you are the owner of a rental property: 

  • Make sure you are not considered a resident of your rental property. This is determined by a series of tests that would determine if your property is for personal use:
    • Make sure the taxpayer did not use the residence for more than 14 days or 10% of the total days rented to others
    • The property must be rented out at fair market value (FMV)
    • Any person who owns an interest in the property would also be considered for personal use
    • Anyone who has an arrangement that lets the owner use some other dwelling 
  • Keep track of all expenses related to the property and have evidence in case of an audit. These expenses include, but are not limited to, mortgage expenses, utilities, and any cleaning expenses. 
  • When you have a rental property your Federal 1040 will also have a Schedule E attached. This schedule will include an overview of income received and expenses. 

Improvements & Depreciation

Some expenses will either need to be capitalized or expensed as they are incurred. A capitalized expense is “an expense added to the cost basis of a fixed asset.” Capitalized expenses will generally be depreciated or amortized over a period of time rather than expensed in the year in which they occurred. Any expense that increases the value of your property, such as improvements, must be capitalized. Some common expenses that must be capitalized include:

  • Additions
  • Lawn & Grounds Improvements
  • Heating & Air Conditioning 
  • Plumbing 
  • Interior Improvements 
  • Insulation

When an expense is capitalized, it is added to your cost basis. Cost basis is the total of the original price you paid for an asset, in this case your rental property, plus any additions or improvements. This may influence when you decide to dispose of your property as you now have a greater financial interest in the asset. 

When considering expenses, you should also remember to include depreciation. Most residential properties are depreciated using the 27.5-year MACRS method. This means that a portion of the cost of the residential property will be expensed over the course of its useful life each year, rather than in one lump sum. Choosing the right depreciation system is also important. The two options taxpayers have are the General Depreciation System or the Alternative Depreciation System. Most taxpayers will use the General Depreciation System, but there are exceptions. If the following list describes your property, you must use the Alternative Depreciation System:

  • Has a qualified business use 50% of the time or less
  • Has a tax-exempt use
  • Is financed by tax-exempt bonds 
  • Is used primarily in farming 

When using the Alternative Depreciation System, the recovery period is 30 years for property placed in service after 12/31/2017, or 40 years if the property is placed in use before that. Remember to keep track of your basis as it is needed to calculate depreciation correctly. Certain property you provide to the rental could also be depreciated; some common examples include:

  • Computers
  • Office furniture 
  • Appliances
  • Carpets 
  • Improvements

The depreciation method for the assets listed above will vary depending on the asset. Be sure to check with your accountant for the appropriate depreciation method to optimize tax savings.

Expenses 

Reducing your tax liability as a taxpayer is always a goal. As discussed above there are many deductions one can take when owning a rental property. Understanding your rental property’s expenses will also help determine what your income will be from the property. Some of the more common expenses are:

  • Supplies
  • Repairs
  • Taxes
  • Legal & Professional Fees
  • Cleaning 
  • Advertising 
  • Insurance

Additionally, there are some expenses that many taxpayers think are deductible but are not. These include:

  • Escrow fees
  • Improvements (need to be depreciated) 

We highly encourage you to discuss any tax considerations regarding your rental property with your accountant before implementation.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.  You should consult with your own tax, legal, or accounting advisor before engaging in any transaction.