Recently, Governor Phil Murphy signed into law various tax bills that will have an immediate and significant impact on taxpayers in New Jersey. The new tax laws make sweeping changes to the state’s Corporation Business Tax (CBT) Act and results in possibly the most significant overhaul of the CBT since it was first enacted in 1945.
They new tax laws are intended to increase revenue, and to raise the highest rate for individual gross income tax purposes. Below is a summary of these changes.
Combined filing
Beginning January 1, 2019, New Jersey will require combined reporting for unitary businesses (Unitary business refers to business activities or operations, which are of mutual benefit, dependent upon, or contributory to one another, individually or as a group) under common control where at least one member of the group is subject to tax in New Jersey. Common control means greater than 50% voting control.
Temporary surtax
The Law imposes a temporary “surtax” on CBT liability (effectively, an incremental increase in the nominal CBT rate) to any taxpayer, excluding public utilities, for tax years 2018 through 2021, at the following rates:
•2.5% for taxpayers with “allocated net income” of over $1 million (effective 11.5% rate) for the periods beginning on or after January 1, 2018 through December 31, 2019.
•1.5% for taxpayers with “allocated net income” of over $1 million (effective 10.5% rate) for the periods, beginning on or after January 1, 2020 through December 31, 2021.
Taxpayers are not permitted to apply credits against the surtax (other than credits for amounts of estimated taxes previously paid and overpayments).
Prior Net Operating Loss (PNOL) carryover
The Law completely overhauls New Jersey’s NOL carryforward rules mimicking the provisions New York used in its dramatic 2015 tax reform to move that state from a separate to combined reporting state. The new rules are:
•Prior year pre-apportioned NOLs will be converted to current year post-apportioned NOLs (PNOL). The carryforward period remains to be 20 years from the date the NOL was incurred.
•PNOLs and NOLs may only be used to offset the specific group member’s income that sustained the loss.
Dividends exclusion
The Law reduces the DRD (Dividend Received Deduction) for dividends paid to CBT taxpayers which owned 80% or more of the stock of a subsidiary from 100% to 95% for the tax year beginning after December 31, 2016. In 2017 only, taxpayers are required to apportion the non-deductible portion of the dividend using either their three year average allocation factor (for the taxpayer’s 2015 through 2017 tax years) or 3.5%, whichever is lower. For tax years after 2017, the 95% DRD continues for subsequent tax years, without the application of the aforementioned apportionment rule.
Other Tax reform responses
New Jersey will decouple from the federal IRC § 199A qualified business income (QBI) deduction, which permits a special deduction of 20% for qualified business income from the individual owners of a pass-through entity (PTE), effective for tax years beginning after December 31, 2017. The deduction, permitted federally, will not be allowed for New Jersey. The Law conforms to the IRC Section 163(j) 30% business interest expense deduction limitation but requires that it apply for CBT purposes on a “pro rata” basis, including inter-company interest already required to be added back to ENI, effective for tax years beginning after December 31, 2017.
Millionaire Tax Bracket
Effective for tax years beginning on or after January 1, 2018, the Law increases the top individual rate on income over $5 million from 8.97% to 10.75%. All other rates below the top marginal rate remain the same. Employers will be required to withhold 15.6% on salaries and wages exceeding $5 million for tax year 2018 as soon as practical, but not later than September 1, 2018.
Other changes
The law also makes other changes in response to tax reform including an increase in the maximum deduction for paid property taxes from $10,000 to $15,000 and the establishment of a new nonrefundable child and dependent care tax credit.
Tax Amnesty
New Jersey will be offering a 90-day amnesty period ending no later than January 15, 2019. The period available for relief is for returns due February 1, 2009 to September 1, 2017. A taxpayer that pays the outstanding tax liability and one-half of the interest due by November 1, 2018 will not be subject to the following:
•The remaining one-half of the interest balance due,
•Late payment and filing penalties,
•Delinquency penalties, and
•Recovery fees and cost of collection.
For questions concerning NJ’s new tax law specifically, or state tax questions generally, please contact your Trusted Roth&Co Advisor, or call 718.236.1600.
