New Jersey enacted technical and substantive changes to 2018 Corporation Business Tax Reform
On November 4, Governor Phil Murphy signed into law SB 3007 /AB 4809, which makes some significant changes to the Corporation Business Tax Act (“CBTA”) that may have both favorable and unfavorable results for corporate taxpayers based on specific circumstances. Many provisions of the bill are effective for the 2019 tax year so it will be important to analyze the impact as soon as possible.
The following substantive changes were made to the CBTA:
- The bill changes New Jersey’s previous interpretation of the dividend received exclusion for a combined group of companies.
- The bill allows for members of a combined group to sell prior year net operating loss (PNOL) carryovers to other members of the combined group following arm’s length pricing. A member of a combined group that is an emerging technology and biotechnology corporation may also sell PNOL carryovers to other members of the combined group.
- A departing member of a combined group, having nexus with NJ, may take its share of the combined NOL carryforward when leaving the group.
- For tax years beginning on or after January 1, 2020, the federal rules regarding limitations imposed on the utilization of certain transferred NOL carryovers will apply to New Jersey NOL carryovers.
- New Jersey will apply similar rules governing federal consolidated return NOLs to New Jersey combined group NOLs.
- The bill allows New Jersey NOL carryforwards to survive a merger between two combined group members with certain restrictions.
- The bill includes overseas companies that have effectively connected income with the U.S. in an “affiliated group” combined filing and not just U.S. companies.
- New Jersey will include income recognized from a previously deferred intercompany transaction in the entire net income of the individual member recognizing the gain, rather than adjusting the group’s taxable income.
- The bill allows any combined group with alternative-minimum-assessment (AMA) credit as of the effective date of the AMA’s repeal to use the credit to offset the combined group’s tax liability.
- The bill treats the combined group as a single taxpayer for purposes of the CBTA rate.
- New Jersey will include the 2.5% surtax, for tax years beginning on or after July 31, 2020, using the entire group’s allocated taxable income as a base (thereby excluding non-unitary or non-operational income directly assigned to New Jersey) and not the income of the separate members with allocated taxable income exceeding $1 million.
- The controlling interest real estate transfer tax and bulk-sale reporting and escrow requirements do not apply on intercompany transfers between combined group members on or after January 1, 2021.
- The bill allows the New Jersey research and development credits to include payments made by a taxpayer in the course of its trade or business to an energy research consortium for energy research.
- As part of the changes made by the bill, no penalties or interest will apply for tax underpayments resulting from the bill as long as the first tax year affected began before January 1, 2021.
The Bill includes the following technical corrections/clarifications:
- The bill allows for the transfer of PNOL carryovers by emerging technology and biotechnology companies.
- An emerging technology and biotechnology company can sell PNOL carryovers in exchange for private financial assistance.
- The favorable apportionment methodology applied to dividends included in entire net income for tax years beginning after December 31, 2016 and before January 1, 2019 applies only to dividends from subsidiaries in which a taxpayer has 80% or more ownership.
- The definition of “taxpayer” is amended to include “any combined group filing a mandatory or elective New Jersey combined return.”
- Corporations that are exempt from CBTA are not members of a combined group.
- A New Jersey S corporation is only included as a taxable member of a combined group if the New Jersey S Corporation elects to be included as a member and taxed at the same rate as the other members of the combined group.
- Combined group members are required to notify New Jersey by the tax return filing due date when there are any mergers, dissolutions, member withdrawals, acquisitions or other changes to the combined group.
- The bill allows certain banking corporations to transition to a non-calendar year reporting basis.
- The bill clarifies that the income from a member’s separate activities will be taxed if the member independently has nexus with New Jersey.
- The CBTA rate applies to taxable net income plus the non-operational income specifically assigned and allocable to New Jersey.
- The bill clarifies that the minimum tax applies to the taxable members of the combined group.
- For tax years ending on or after July 31, 2020, the due date of the New Jersey return is 30 days after the original due date of taxpayer’s federal corporate income tax return.