New Jersey Business

 Tax Reform Act

New Jersey has enacted the Business Tax Reform Act (A.B. 2501), which provides a major revision of the New Jersey corporation business (income) tax.

Broader Tax Applicability

The tax formerly applied to corporations doing business, employing or owning capital property, or maintaining an office in New Jersey, and now extends to corporations deriving any income from New Jersey sources.

Tax Rate Changes

Minimum tax: The minimum tax is increased from $210 to $500, beginning with the 2002 calendar year. The minimum tax for corporations that are members of affiliated or controlled groups with total payrolls of $5 million or more is $2,000.

Small businesses: The tax rate for businesses that are not partnerships and have less than $50,000 of entire net income is reduced from 7.5%, to 6.5%.

S corporations: The phase out of tax on S corporations is frozen at the rate of 1.33% for privilege periods ending on or after July 1, 2001, but on or before June 30, 2006. The rate will drop to 0.67% for privilege periods ending on or after July 1, 2006, but on or before June 30, 2007, and will decrease to 0% for privilege periods ending on or after July 1, 2007. Formerly, the rate was to reach 0% for privilege periods ending on or after July 1, 2003.

Alternative Minimum Assessment

The Act provides an alternative minimum assessment (AMA) that will require companies to assess their tax liability based on their amount of gross receipts or gross profits. Corporations pay either the corporation business (income) tax or the AMA, whichever is larger. The AMA will expire for privilege periods beginning after June 30, 2006, except for out of state taxpayers doing business in New Jersey who are not subject to the CBT.  S corporations, investment companies, professional corporations, and corporations operating as cooperatives under federal requirements are exempt from the AMA.

Gross profits are defined as gross receipts minus cost of goods sold.

The first $2 million in gross receipts and $1 million in gross profits would be exempt from the AMA.

The AMA formula allows businesses with gross receipts of up to $20 million to exclude a portion of gross receipts or gross profits    from the AMA on a phase-out basis.

Companies with more than $20 million in gross receipts/$10 million in gross profits would pay an AMA rate on total gross receipts/profits based on a graduated table.

If a company’s AMA exceeds its CBT in one year, the difference between the AMA and CBT is a credit that carries forward without limit to the company’s CBT liability in a future year.

Pass-Thru Entities

Pass-thru entities classified as a partnership for federal income tax purposes, including, but not limited to, a partnership, a limited liability partnership, or a limited liability company that have income from New Jersey sources and have more than two owners, are subject to a filing fee of $150 for each owner of an interest in the entity, up to a maximum of $250,000.

Pass-thru entities other than those listed on a national exchange must make a payment on the share of income of each nonresident owner at a 9% rate for corporate owners and a 6.37% rate for individual owners.  The payment is credited to separate accounts for each owner, and may be credited against their tax liabilities.

A similar filing fee of $150 per licensed professional for professional corporations with more than two licensed professionals, also capped at $250,000 per corporation annually.

Partnerships with two members would be exempt from the fee.

Partnerships are not subject to the $150 K-1 filing fee if they do not derive income in New Jersey.

Miscellaneous Changes

The law also provides the following changes:

Royalty payments and other intangible expenses are disallowed as a deduction from New Jersey entire income when the royalty payments and intangible expenses are made to a parent or affiliated company.  There are exceptions to the disallowance of royalty payments and other intangible expenses made to a parent or affiliated company.

Interest paid to affiliate entities would be added back into entire net income.  There are exceptions to the disallowance of interest paid to affiliate entities.

The deduction for research and experimental expenditures is disallowed to the extent those expenditures are qualified research expenses or basic research payments claimed under the increased research activities credit against corporation business (income) tax and are not used to claim a federal research and development credit.

Dividends received from subsidiaries in which the parent company owns less than a 50 percent interest are disallowed.  Under current law, only 50% of these dividends are taxable. 

One hundred percent of the nonoperational income (income that is unrelated to the usual operations of a business) of a taxpayer that has its principal place from which the trade or business is directed or managed in New Jersey is subject to taxation.

The deduction is disallowed for net operating loss (NOL) carryover for privilege periods beginning during calendar years 2002 and 2003, but extends the seven-year carry forward period by two years.  Therefore, companies earning a profit in 2002 and 2003 will not be able to carry forward losses to reduce their tax in 2002 and 2003.

New Jersey does not allow a deduction for federal bonus depreciation, for property acquired after September 10, 2001, and before September 11, 2004.

Throwout Rule

    A throwout rule means if sales earned in other jurisdictions are not taxed there (“Nowhere sales”), they cannot be counted when computing the fraction of total taxable income to New Jersey tax.  “Nowhere sales” are thrown out from the denominator of the sale fraction in the apportionment formula, which causes more of the income of the corporation to be assigned to states where the corporation actually has operations.  

    There is a $5 million dollar cap on nowhere sales thrown out from the denominator for affiliated groups.