The New Jersey governor signed a bill that:
- impose a surtax on corporations for two years;
- decouples from certain provisions of the federal Tax Cuts and Jobs Act;
- reduces the dividend exclusion;
- requires market-based sourcing; and
- introduces combined reporting.
The bill takes effect immediately and applies as noted below.
Surtax on Corporations
A surtax on a corporation’s allocated net income is imposed. The surtax is equal to:
- 2.5% if the corporation has entire net income over $1 million for 2018 and 2019; and
- 1.5% if the corporation has allocated net income over $1 million for 2020 and 2021.
A “taxpayer” is any business entity required to report and pay federal income tax.
Nonconformity with Federal Tax Reform Provisions
With respect to the Tax Cuts and Jobs Act, the law creates state income tax adjustments that:
- disallow the 20% deduction for qualified business income from a pass-through entity (IRC Sec. 199A);
- disallow federal deductions against the repatriation (transition) tax on accumulated foreign earnings (IRC Sec. 965); and
- apply the interest deduction limitation (IRC Sec. 163(j)) on a pro-rata basis to interest paid to both related and unrelated parties.
The pro-rata application of the interest deduction applies regardless of whether the related parties are subject to an addback.
The law reduces the dividend exclusion amount for taxpayers receiving dividends from an 80% or greater owned subsidiary. The exclusion goes from 100% to 95% of the dividends included in federal taxable income after 2016. The taxpayer must use either:
- their three year average allocation factor for the taxpayer’s 2015 through 2017 tax years; or
- 3.5%, whichever is lower.
After 2017, the exclusion goes to 95% of dividends included in federal income, paid or deemed paid from an 80% or greater owned subsidiary.
Sales of Services
After 2018, sales of services are sourced to New Jersey if the benefit of the service is received in New Jersey. If the benefit is received inside and outside of New Jersey, the portion of the sale allocated to New Jersey is based on the percentage of the total value of the benefit received in New Jersey. If the state or states cannot be determined for:
- an individual customer, the benefit of the service is deemed to be received at the customer’s billing address;
- any other customer, the benefit of the service is deemed to be received at the location from which the services were ordered in the customer’s regular course of operations; and
- if the location from which the services were ordered in the customer’s regular course of operations cannot be determined, the benefit of the service is deemed to be received at the customer’s billing address.
The receipts from the services of a registered securities or commodities broker or dealer and receipts from asset management services are sourced to New Jersey if the customer is in New Jersey.
After 2018, New Jersey requires combined income tax reporting for corporations that are members of a unitary business group.
A combined group will be entitled to a deduction if the changes made by the law result in an aggregate:
- increase to the combined group members’ net deferred tax liability;
- decrease to the members’ net deferred tax asset; or
- change from a net deferred tax asset to a net deferred tax liability.
The deduction is available for 10 years. The combined group can claim the credit after its first privilege period beginning 5 years after July 1, 2018.
Interest Expense Addback
An existing exception to the interest expense addback is amended. The current deduction is allowed if the taxpayer establishes that the interest is directly or indirectly paid, accrued or incurred to a related member in a foreign nation that has in force a comprehensive income tax treaty with the United States. The taxpayer must now also establish the related member:
- was subject to tax in the foreign nation on a tax base that included the payment paid, accrued, or incurred; and
- the related member’s income received from the transaction was taxed at an effective tax rate equal to or greater than 3% less than the rate of tax applied to taxable interest by New Jersey.
Net Operating Loss
A net operating loss for a tax period after July 1, 2018 can be carried over for 20 years. A “net operating loss” is the excess of the deductions over the gross income used in computing entire net income. A net operating loss will not include any net operating loss incurred before July 1, 2018.
Net operating losses existing before July 1, 2018 must be converted to an “unabsorbed portion of net operating loss.” These losses can also be carried over for 20 years.
If you have any questions or if you would like more information, contact Fred Schutz at (856) 722-5300 ext. 201 or Dave Gill at ext. 210.