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New Jersey Changes Course on Treatment of Foreign GILTI Income

On August 20, 2019, to the surprise of many, the New Jersey Division of Taxation “has made a decision to revise the allocation (apportionment) methodology of GILTI and FDII”. As part of the Tax Cuts and Jobs Act tax reform, a new provision was created to tax certain foreign activities as global intangible low-taxed income (“GILTI” income).

The states have varied in the treatment of GILTI and its related deductions (i.e. IRC Sec. 250 deductions), with some states adopting conformity, with inclusion of the income as well as the deduction; while other states requiring the inclusion of income, but without the related deduction; and other states providing a complete or almost complete exclusion of the income, either through a DRD or other mechanisms.

Furthermore, the states have also applied wide-ranging guidance of the apportioning of the GILTI income included in the tax base, with many states providing unclear guidance, or simply a lack of direction.

Specific to New Jersey, the state conforms to GILTI income, as well as the deduction modifications specified in IRC Sec. 250. This alert does not affect the state tax base, but revises the methodology in apportioning this income to the state.

Prior to New Jersey’s recent alert, with guidance issued in Technical Bulletin-85 (TB-85), the state addressed its interpretation of the apportionment factor and the inclusion rules (i.e. inclusion within the numerator / denominator) relating to the computation of the apportionment factor for GILTI income, which was later revised in TB-85(R). The Bulletins asserted apportioning GILTI income separately from other business income, using New Jersey GDP relative to the GDP in all states where the taxpayer had nexus. There were some open questions on the mechanics of this based on facts and circumstances, as well as the constitutionality of this.

In a surprise alert, the state reversed its guidance, suggesting that now GILTI income should be apportioned with the rest of business income, including it in the denominator, but suggesting in certain situations a possible inclusion in the numerator as New Jersey amounts. The alert does not provide clarity when there may be a possible inclusion in the numerator. The alert states that additional guidance is expected to be released shortly.

Implications

As a result of this reversal, taxpayers should consider their New Jersey GILTI calculations, and continue to monitor state guidance in the event an amended return may be applicable. This revision may increase state tax for some, but may be beneficial for others. Moreover, the state will need to address if they will be reissuing state tax forms, as these changes will void some of the GILTI related sections of the forms. Continued developments on this are expected, which could affect income tax provisions, and estimates. For more information, please fill out the form below.

Author: Jason Rosenberg, CPA, CGMA, EA, MST  |  jrosenberg@withum.com

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