New Jersey Corporate Tax Overhaul: 2019 Planning Considerations

In 2018, New Jersey Gov. Phil Murphy signed Assembly Bill No. 4202 into law. The bill included tax provisions that respond to the Tax Cuts and Jobs Act (TCJA). Most significantly, changes were made to the Corporation Business Tax. Later that year, Gov. Murphy signed Assembly Bill No. 4495, which then made technical corrections to Assembly Bill No. 4202 and clarified effective dates.

As your business begins to plan for 2019, the following information will be important.

TCJA Responses for New Jersey C Corporations

• New Jersey provides that corporate income is calculated in generally the same method as federal taxable income except for the specified adjustments in New Jersey statute.
• Will follow the federal interest expense limitation to the extent that it is applied pro rata basis to interest paid to related and unrelated entities.
• Did not adopt the 100 percent deduction of bonus depreciation for assets placed in service after Sept. 27, 2017, and prior to Jan. 1, 2023.
• The federal deduction allowed for certain deemed dividends under IRC 965 is disallowed therefore any deduction taken in calculating the federal income would have to be added back. The deemed dividends under IRC 965(a) are deductible under the dividends received deduction dependent on the level of ownership.
• The deduction for certain includable foreign income under IRC 250 is allowed to the extent the foreign income is included in New Jersey income.
• Repealed state alternative minimum tax.
• Generally, the provisions responding to the TCJA are effective for tax year 2017 and after. This does not apply to the repeal of the state alternative minimum tax. It is effective Jan. 1, 2018.

New Jersey C Corporation Business Tax Changes

• Mandatory Combined Filing
  • Business entities which are commonly owned and engaged in a unitary business are required to file a combined unitary tax return starting with tax years ending on or after July 31, 2019.
  • By default the combined group files on a water’s-edge basis but the group can make an election to file on a worldwide or affiliate basis. This election is binding for five years.
  • Combined apportionment is determined with respect to each respective entity’s activities in New Jersey (Joyce method).
• Net Operating Losses – Net operating losses are to be applied on a post-apportionment basis beginning with tax years ending on or after July 31, 2019. Losses incurred prior to July 31, 2019, must be converted from being deducted prior to apportionment. Losses incurred by a taxpayer who must be included in a combined group can be utilized after combination.
• Apportionment – Market-based sourcing for sales of services was adopted for tax years ending on or after July 31, 2019. Sales are considered in the state if the benefit is received in the state.
• For tax years beginning on or after Jan. 1, 2018, state research and development credit are nonrefundable.
• Entities subject to the corporation business tax are subject to an additional surtax if their New Jersey source taxable net income exceeds $1 million. The tax rate for 2018-2019 is 2.5 percent and lowers to 1.5 percent for tax years 2020-2021.