On October 4, 2018, Governor Phil Murphy signed into law Assembly Bill 4495 (“A4495”), a seemingly mundane piece of legislation embedded with a few clandestine tax increases. The stated purpose of A4495 is to make technical corrections and clear up ambiguities engendered by recently enacted tax legislation. The bill makes substantive changes to the Corporation Business Tax (“CBT”) as well. Highlights of the bill are as follows.
A4495 Imposes Taxes on Global Intangible Low Taxed Income
The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires U.S. shareholders of controlled foreign corporations (CFCs) to include in gross income their “Global Intangible Low Tax Income”, otherwise infamously known as “GILTI”. GILTI is deemed repatriated to the U.S. in the year earned. It is codified in Internal Revenue Code (IRC) Sec. 951A.
Because IRC Sec. 951A is a federal law, it does not impose obligations on taxpayers to include GILTI on a state tax return. The new state legislation, however, does. Through A4495, New Jersey adopts the federal treatment of GILTI. Thus, New Jersey taxpayers must include GILTI in their New Jersey taxable income. A corresponding deduction is allowed equivalent to what is permitted under federal law.
Opponents of New Jersey imposing tax on GILTI claim it will place the Garden State at a competitive disadvantage. They say it will make New Jersey one of few that mirrors the Federal government’s taxation of the foreign sourced income.
Changes to Net Operating Loss and Dividends Received Deductions
The bill changes the formula for calculating Net Operating Losses (“NOLs”) to the disadvantage of some New Jersey taxpayers. A NOL is defined as the excess of allowable deductions over gross income, which can be carried forward 20 years to reduce taxable income incurred by a corporation. For corporate taxpayers who receive dividends from companies whose stock they own a Dividends Received Deduction (“DRD”) is allowed to lessen the burden of triple taxation.
Historically, in computing a NOL, New Jersey taxpayers have not been permitted to take DRDs into account. In July 2018 Governor Murphy signed a bill that originally reversed this taxpayer-unfriendly policy. The October legislation, however, turns back the clock. It provides, once again, in essence DRDs may not be used to increase carryforward operating losses.
Those opposed to the NOL limiting provision say it will harm small and medium-sized startup companies that often do not turn a profit in their early years.
Tax Treatment of EDA Tax Credits
The new law provides guidance on the definition of “gross income” for the purposes of the Grow New Jersey Assistance Program. According to the bill, gross income does not include gains or income from the sale or assignment of a tax credit certificate under the Grow New Jersey Assistance Program for any sale or assignment of a tax credit approved by the New Jersey Economic Development Authority on or prior to July 1, 2018 without regard for the date the sale or assignment occurs.
Combined Reporting Start Date Modified
The bill changes the date whereby parent corporations and their subsidiaries must file a single combined return (“combined reporting”). Under combined reporting a business essentially reports on a combined basis the results of operations of all related entities, disregarding the existence of the separate legal entities of affiliated companies. On July 1, 2018, Governor Murphy signed legislation requiring combined reporting for certain corporations for tax years beginning on or after January 1, 2019. A4459 changes the effective date to tax years ending after July 31, 2019.
Prior Net Operating Loss Conversion Carryover Addressed
The new legislation contains a technical provision designed to facilitate the transition to combined reporting. A critical component of implementing the switch is properly accounting for unused NOL carryforwards generated before the effective date of the new reporting requirement. The bill clarifies that the base year for calculating unabsorbed NOLs is 2018, not 2017.
Utility Exclusion from Combined Reporting Broadened
Under current law, entities regulated by the Federal Energy Regulatory Commission, the New Jersey Board of Public Utilities, or a similar regulatory body of another State, are exempted from certain combined reporting provisions with respect to rates charged to customers for electric or gas services, per N.J.S.A.54:10A-4.6. The bill extends this exemption to water and wastewater services.
Combined Group Member Corporation Business Tax Minimum Filing Fees Addressed
A member of a consolidated or affiliated group of corporations with a total payroll of $5 million or more is currently subject to a $2,000 minimum tax. A4495 states for privilege periods ending on or after July 31, 2019, a minimum tax is imposed of $2,000 on each member of a combined group filing a mandatory or elective New Jersey combined return.
If you have questions about how the new state tax bill may affect your bottom line, please contact your local Withum tax advisor or fill out the form below and a member of our State and Local Tax Services Group will reach out to you.