New Jersey Enacts Additional Corporation Business Tax Reforms
SynopsisRecently, in an effort to modernize the state’s corporate tax system, New Jersey enacted sweeping changes to its Corporation Business Tax (CBT). The principle amendments (A4202) were passed on July 1, 2018, as part of the state’s 2019 fiscal year budget and included significant reforms. Further, on October 4, 2018, New Jersey Governor Phil Murphy signed additional legislation (A4495) enacting both various technical corrections and substantive changes to the July CBT amendments.
Recap of July CBT changesThe July CBT amendments enacted significant legal changes. Among the most notable changes, New Jersey adopted mandatory combined reporting for commonly-owned corporations operating a unitary business; switched to market-based sourcing for service revenue; reduced the dividends received deduction; and imposed a temporary corporate income tax surcharge. (For more information, see our Alert dated July 12, 2018).
Combined reporting – new deferred tax deduction for public companiesWith New Jersey’s adoption of combined reporting, a combined group (consisting of a publicly traded company and eligible affiliates), will be entitled to a new deduction if filing on a combined basis results in either: an aggregate increase to the combined group members’ net deferred tax liabilities, an aggregate decrease to the members’ net deferred tax assets, or an aggregate change from a net deferred tax asset to a net deferred tax liability.
The deduction would be claimed over a ten-year period, beginning with the combined group’s first privilege period beginning on or after January 1 of the fifth year after the effective date of New Jersey’s combined reporting rules.
An affected combined group would deduct from the combined group’s entire net income an amount equal to one-tenth of the amount necessary to offset the resulting aggregate increase in deferred tax liabilities or aggregate decrease in deferred tax assets.
In other words, publicly traded businesses seeing an increase in NJ CBT due to this change will be able to offset at least some of this additional cost.
Note that a combined group intending to take this new deduction must file a statement with the Division of Taxation on or before July 1 of the year after the first privilege period for which a New Jersey combined return is required (e.g., for calendar year taxpayers, this form is due on July 1, 2021). This statement must specify the total amount of the group’s deduction.
Summary of October CBT changesThe October 4, 2018 legislation made various corrections and clarifications to the July amendments, as well as certain substantive changes. Below are brief updates on some of the noteworthy corrections and changes:
Revised effective dates - combined reporting
- Pursuant to the October legislation, combined reporting is now required for tax years ending after July 31, 2019. The prior amendments originally required combined reporting for tax years beginning on or after January 1, 2019.
Minimum tax - combined reporting
- The minimum tax of each member of a combined group filing a mandatory or elective New Jersey combined return shall be $2,000 for the group privilege period.
Allocation of IRC Section 965 repatriation income correction
- The July legislation permitted taxpayers to allocate their IRC Section 965 repatriated income using the lower of the average allocation factors for the 2015, 2016, and 2017 tax years or 3.5%. This was corrected to the lower of the average allocation factors for the 2014, 2015, and 2016 tax years or 3.5%.
Imposition of GILTI and FDII
- In signing the federal Tax Cuts and Jobs Act of 2017 (TCJA), Congress sought to incentivize U.S. companies to keep intangible income in the U.S. and not overseas. In essence, the TCJA enacted new Section 951A to impose federal income tax on certain global intangible low tax income (GILTI), and new Section 250 to provide for a corresponding federal deduction for certain foreign derived intangible income (FDII). The New Jersey October 4, 2018 legislation now separately provides a New Jersey CBT deduction that mirrors the federal FDII deduction relative to the tax on GILTI income for privilege periods beginning on or after January 1, 2018.
- In a signing statement, Governor Murphy acknowledged concerns that certain taxpayers may be disproportionately impacted by the new tax on GILTI. In his statement, the governor further sought to assure the business community that the Division of Taxation has discretion to provide relief where appropriate and would monitor the roll-out of the new tax.
Automatic extension to file CBT-100 and CBT-100S returns for certain fiscal tax year filersOn October 24, 2018, the Division of Taxation issued a Notice informing taxpayers that the 2018 CBT-100 and CBT-100S return forms are in the process of being finalized. Therefore, taxpayers filing CBT-100 or CBT-100S returns, with an original due date of November 15, 2018 or December 15, 2018 (i.e., fiscal tax year filers which had a tax year ending July 31, 2018 and August 31, 2018, respectively), have been granted an automatic extension to January 15, 2019 to file their tax returns. Provided such returns are filed within the additional extension period, late filing penalties and interest will not be assessed. The extension does not, however, extend the time to make required payments.
What does CohnReznick think?New Jersey, while late in adopting unitary and market-source apportionment rules as compared to many other states, enacted sweeping reforms to its CBT. These changes could have significant consequences for corporate taxpayers (often beneficial to New Jersey based business and detrimental to non-New Jersey based businesses). Taxpayers should carefully review the July and October changes to understand how these reforms will impact them.
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CPA, JD, Managing Partner - Tax
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