Impact of the FY 2019 Budget on NJ State Tax

New Jersey Governor Phil Murphy and the State’s Legislature ultimately compromised on the State’s FY 2019 budget signed into law July 1, 2018, narrowly averting a state government shutdown. The $37.4 billion Budget features a number of amendments and alterations affecting individual and business income, property, and sales taxes, and was accompanied by additional legislation providing for a State amnesty to take effect in the near future.

NJ Individual Tax Changes

The highlights of the legislation affecting the New Jersey Gross Income Tax for individuals includes:

  1. Tax rate increases in 2018 for high income taxpayers
  2. Disallowance of Federal 20% Pass-through Deduction
  3. Property tax maximum deduction increased
  4. Child and dependent care credit allowed
  5. Earned income tax credit percentage increased

Tax rate increases

A new top income tax bracket has been established: New Jersey taxable income exceeding $5 million will be taxed at 10.75%, regardless of the filing status of the taxpayer. The new law also requires employers that are subject to the state’s withholding requirements to begin withholding at a rate of 15.6% on salaries and wages in excess of $5 million in 2018. However, no penalties will be imposed on employers for insufficient withholding or on underpayments of estimated taxes for such wages received before September 1, 2018.

Disallowance of Federal 20% Pass-thru Deduction

New Jersey will not allow the new 20% Federal tax deduction for income from pass-through entities pursuant to Internal Revenue code section 199A.

Property tax maximum deduction increased

The maximum property tax deduction for a resident taxpayer has been increased from $10,000 to $15,000 for 2018. Note that the maximum deduction for property taxes on the federal return will only be $10,000.

Child and dependent care credit allowed

For tax year 2018, New Jersey has established a child and dependent care tax credit for families with incomes under $60,000, if they were allowed a credit on their federal return. The allowable credit will vary from 10% to 50% of the federal credit, depending on the amount of New Jersey taxable income.

Earned income tax credit percentage increased

The earned income tax credit that can be claimed on the New Jersey return has been increased for future tax periods. The amount that be claimed is as follows:

  • 37% of the federal tax credit in 2018
  • 39% of the federal tax credit in 2019
  • 40% of the federal tax credit for 2020 and thereafter

NJ Corporate Tax Changes

New Jersey Governor Phil Murphy signed legislation for the FYE 2019 budget of $37.4 billion after coming to agreement with the New Jersey Legislature.

The highlights of the legislation affecting the New Jersey Corporation Business Tax (“CBT”) includes:

  1. Temporary increase to the corporation business tax rate
  2. Mandatory combined reporting
  3. Market sourcing for services provided
  4. Reduced dividend exclusion on 80% or more owned subsidiaries
  5. Research and development credit will no longer be refundable

Temporary increase to the corporation business tax rate

For all taxpayers, except for public utilities, the top marginal corporate tax rate will increase from 9% to 11.5% during the 2018 and 2019 tax years on New Jersey taxable income in excess of $1 million. In the 2020 and 2021 tax years, the rate will be reduced to 10.5%.

Mandatory Combined Reporting

Effective for periods on or after January 1, 2019, New Jersey is adopting mandatory unitary combined reporting for its Corporation Business Tax. A combined group is defined as “a group of companies with 50% common ownership engaged in a unitary business.”

The managerial member of a combined group may elect to have the combined group determined on a world-wide basis or an affiliated group basis. The default if no such election is made will be the water’s edge election, which includes any:

  • Domestic entity unless 80% of its property and payroll are based outside the U.S.
  • Foreign entity if 20% of their property and payroll is based in the U.S.
  • Any member that earns more than 20% of its income, directly or indirectly, from intangible property, which is also deducted against income from related members
  • Any member that has income and nexus in New Jersey

Net operating losses from prior “separate return” years will be converted from a pre-allocation loss to a post-allocation loss. The allocation factor will be based on the last period before the effective date of the legislation.

In addition, S-corporations may elect out of the combined reporting requirements.

Market-Based Sourcing for Services

Beginning for periods on or after January 1, 2019, the law adopts a market-based sourcing for services provided. The sourcing for services will be based on where the benefit of the services is received, and no longer on where the costs underlying their associated services are performed. If the benefit of the service is received in New Jersey, the receipts will be sourced to New Jersey. Absent information detailing where the benefit is received, the service will default to being sourced where the billing address of an individual customer and the location from where the services are ordered in the case of a non-individual. If the benefit is received in more than one state, then reasonable approximation can be used.

Reduced dividend deduction on 80% or more owned subsidiaries

For tax years after December 31, 2016, the dividends-received-deduction for 80% or more owned subsidiaries has been reduced from 100% to 95%. However, the 50% exclusion remains unchanged for those 50% or more owned subsidiaries.

For tax years beginning after January 1, 2017 through December 31, 2017, taxpayers should apportion their dividend income included in entire net income using a 3-year average allocation factor or 3.5%, whichever is lower.

For tax periods after January 1, 2018, normal apportionment rules will be applied for sourcing dividend income.

Research and development credit will no longer be refundable

For tax periods beginning after 2017, the research and development credit will no longer be refundable to New Jersey taxpayers.

Sales Tax

In response to the U.S. Supreme Court’s decision in Wayfair v. South Dakota, New Jersey has instituted its own economic nexus threshold for sales tax nexus on remote sellers:

  • $100,000 in taxable sales to New Jersey-based customers; or
  • 200 or more separate transactions in the state.

This legislation is anticipated to go into effect beginning on October 1, 2018.

The Governor is soon expected to sign the bill into law.

Forthcoming State Tax Amnesty to Go Into Effect

New Jersey has also signed into law Bill A.3438, which provides that the New Jersey Division of Taxation is to establish a tax amnesty program “…during [a] period that will last no longer than 90 days and end no later than January 15, 2019.” The Amnesty will provide for waiver of 100% of penalties and 50% of the associated underlying interest for tax returns due on or after February 1, 2009 and prior to September 1, 2017. The legislation was signed on July 1, 2018 but the Division has yet to initiate its start date now.

For questions on NJ state tax, contact our State and Local Services Group by filling out the form below.

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