Tax Reform Friday: 10 Things to Know About New Jersey’s Second Bite at the Apple

It appears New Jersey isn’t quite done with tax reform, with Gov. Phil Murphy (D) soon expected to sign A. 4262, the state’s latest tax reform bill, into law. A new version of the bill, revised at Murphy’s recommendation, was read in the Assembly on Aug. 27. Any conflicting provisions presented by A. 4262 are intended to supersede those of A. 4202, enacted July 1.

For corporate taxpayers, the proposed changes will affect many important provisions of New Jersey’s previous tax reform bill, including the effective dates for mandatory combined reporting, market based sourcing, and new franchise tax rates. Here are ten things to know about the differences between A. 4262 and A. 4202:

  1. All provisions relating to combined reporting or market based sourcing will take effect for privilege periods ending on and after July 31, 2019, instead of those beginning on and after Jan 1, 2019.

  2. The new franchise tax rates will apply to privilege periods ending on or after July 31, 2019. In addition, each member of a combined group must pay a minimum franchise tax of $2,000.

  3. The bill clarifies that the deduction limitation under I.R.C. § 163(j) will apply pro rata to interest paid to both related and unrelated parties, but that any interest not allowed as a deduction under other New Jersey law will be excluded.

  4. For corporations other than banking corporations, the exclusion of 100 percent of dividends paid by a subsidiary, owned 80 percent or more by the parent, applies only to privilege periods ending on or before Dec. 31, 2016. For privilege periods beginning after Dec. 31, 2016, but before Jan. 1, 2019, the exclusion amount will be 90 percent, and for privilege periods beginning on or after Jan. 1, 2019, the exclusion amount will be 95 percent.

  5. Net operating losses (NOLs) may not be carried over where corporations have a change in ownership of 50 percent or more due to stock sale and redemption and loss resulting from a change in trade or business. Additionally, the Director of the Division of Taxation may disallow a carryover where the facts support the premise that the corporation was acquired for the use of its NOL carryover.

  6. Taxable members of a combined group must include the receipts of nontaxable members assignable to New Jersey in their sales factor numerator, and use the combined group’s denominator.

  7. Changes to the membership of a combined group must be reported to the director within 120 of the change, as opposed to 90 days.

  8. A water’s-edge combined group will include the income and allocation factors of domestic international sales corporations (DISCs), controlled foreign corporations to the extent of their Subpart F income with exception, members doing business in a tax haven, and foreign members with income effectively connected to the U.S. The new bill also provides a definition of “tax haven.”

  9. The director may require the inclusion of the income and allocation factor(s) of any taxpayer not otherwise includable in a combined group to reflect proper allocation of income, or when there has been an avoidance or evasion of tax.

  10. The repeal of the consolidated return election for air carriers will take effect for privilege periods ending on and after July 31, 2019, instead of privilege periods beginning on and after Jan. 1, 2018.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: With the end date of New Jersey’s legislative session yet to be decided, what other tax issues should the New Jersey legislature address this year?

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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