On July 1, New Jersey Gov. Phil Murphy signed into law the state’s budget legislation, narrowly avoiding a government shutdown. To the surprise of many observers, the legislation includes a number of revisions to New Jersey’s corporation business tax (CBT) that seemed to be off the table months ago. Lawmakers implemented a mandatory unitary-combined reporting requirement, added a corporate surcharge on corporations with allocated net income greater than $1 million, and added market-based apportionment rules for receipts from services. These new rules and others are part of Murphy’s attempt to fund a $37.4 billion budget, the largest in New Jersey’s history.
Corporation Business Tax
Surtax. Taxpayers, excluding public utilities, with New Jersey allocated net income greater than $1 million will pay a 2.5 percent surtax for tax years beginning in 2018 and 2019 on top of New Jersey’s 9 percent rate, for an 11.5 percent total CBT rate. The surtax decreases to 1.5 percent for tax years beginning in 2020 and 2021.Dividends received deduction. The dividends received deduction has been reduced from 100 percent to 95 percent when the taxpayer owns and controls at least 80 percent of the corporation. The reduction is effective retroactively to include tax years beginning after Dec. 31, 2016, giving New Jersey a chance to cash in on undistributed foreign earnings that were deemed repatriated under federal tax reform enacted in late 2017.
Mandatory unitary reporting. Effective for tax years beginning on or after Jan. 1, 2019, New Jersey will require a group of corporations with common ownership to file on a unitary basis. Common ownership is defined as a single owner owning directly or indirectly more than 50 percent of the voting control. The changes provide for water’s-edge filing with worldwide and affiliated group elections, allow net operating losses to be deducted on a post-allocation basis, and include a deferred tax liability deduction for publicly traded companies when their deferred tax assets reversed to liabilities because of the combined reporting requirement. The deduction will be available over a 10-year period beginning with the fifth year of combined reporting.
Market sourcing for services. Effective for tax years beginning on or after Jan. 1, 2019, sales of services will be sourced to New Jersey when the benefit of the service is received within New Jersey. Sales of services to individuals will be sourced to New Jersey when the billing address is within the state.
Related member addback exclusion. The treaty exception for intercompany interest expense previously required no addback if payments were made to an affiliate located in a foreign country that had a tax treaty with the U.S. The exception now is limited to instances when the related member’s income received from the transaction is taxed at an effective tax rate within three percentage points of the rate applied to taxable interest in New Jersey.
Research and development credit. Effective Jan. 1, 2018, the new rules provide that the research and development credit is not refundable.
Other Tax Law Changes
Prearranged rides. New Jersey will impose a 50 cent surcharge on prearranged rides (such as Uber and Lyft) beginning Oct. 1, 2018.
Tax amnesty. New Jersey taxpayers will have a 90-day period to participate in an amnesty program, ending no later than Jan. 15, 2019. The state will not assess penalties and will decrease interest by 50 percent for taxes that were due between Feb. 1, 2009, and Sept. 1, 2017.
New individual income tax bracket (multimillionaire’s tax). New Jersey is imposing a 10.75 percent income tax rate on an individual’s entire net income in excess of $5 million.