New Jersey Enacts Combined Reporting and Updates Federal Conformity in Sweeping Tax Overhaul

On July 1, 2018, New Jersey Gov. Phil Murphy (D) signed a massive budget bill, 2018 N.J. A. 4202, which includes the most significant changes to the New Jersey Corporation Business Tax in recent memory. (For coverage of the political fallout from Murphy’s fight with the New Jersey Assembly, see Elise Young’s July 4, 2018, article on Bloomberg Daily Tax Report: State.) What does this mean specifically for corporate taxpayers in New Jersey? Here is a brief rundown of some of the changes that are effective, with exception, for privilege periods beginning in 2018 and after.

Market-Based Sourcing for Services

Beginning Jan. 1, 2019, sales of services will be sourced to New Jersey if the benefit of the service is received in the state. If the benefit of the service is received both within and outside the state, sourcing will be based on a proportional allocation of the value of the services. New Jersey then provides cascading rules of reasonable approximation distinguishing between individual and business customers.

Combined Reporting Comes to New Jersey

Also beginning Jan. 1, 2019, New Jersey will require combined reporting for unitary businesses under common control where at least one member of the group is subject to tax in New Jersey. Common control means greater than 50 percent voting control under standard federal definitions.

The reporting group will be comprised of those members of the group that are subject to tax under the New Jersey Corporation Business Tax. Although New Jersey enacts a specific definition of “unitary business,” the statute specifically states that the term should be construed “to the broadest extent permitted” under the U.S. Constitution.

Combined groups will be allowed a deduction if they experience an aggregate increase in their deferred tax liability, or a corresponding decrease in a deferred tax asset as a result of combined reporting. In short, the combined group will be allowed to spread out the corresponding increase in tax liability over a 10-year period.

Corporate Surtax for 2018–2021

For tax years beginning in 2018 and 2019, New Jersey has enacted a 2.5 percent surtax for any taxpayer (other than a public utility) that has allocated net income in excess of $1 million. For tax years beginning in 2020 and 2021, the surtax is reduced to 1.5 percent. Generally, no credits are allowed against the surtax, except for those for installment payments, estimated tax payments made with a request for a filing extension, and overpayments from prior years.

Dividends Received Deduction

New Jersey will provide a 95 percent deduction for dividends included in the calculation of federal taxable income but only if the taxpayer has an 80 percent or more “ownership of investment” in the subsidiary. The deduction is lowered to 50 percent if the taxpayer has only a 50 percent or more ownership interest in the subsidiary.

Modification to Interest Addback Exception

New Jersey also amended one of the exceptions to its interest addback requirements. The taxpayer is not required to add back interest if the following criteria are met:

  • the taxpayer can demonstrate that the interest was paid to a related member in a foreign country;
  • the related member was subject to tax in that country on a tax base that included the interest payment; and
  • the effective rate of the tax was equal to or greater than New Jersey’s rate, minus three percentage points.

Decoupling From Key Provisions of Federal Tax Reform

New Jersey will specifically decouple from the I.R.C. § 199A Qualified Business Income deduction, as well as the changes to I.R.C. § 163(j), governing the net interest expense limitation.

Special Apportionment for Air or Ground Freight Transportation

A combined group engaged in transportation of freight by air or ground is entitled to use an apportionment method based on the ton miles traveled by the taxpayers’ mobile assets in New Jersey as compared to miles traveled everywhere. This apportionment method is available only to combined groups that derive 50 percent or more of their entire net income from air or ground transportation of freight.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What do the changes to the Corporation Business Tax mean for taxpayers?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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