The New Jersey Legislature passed a bill that would:
- impose a surtax on corporations for two years; and
- decouple from certain provisions of the federal Tax Cuts and Jobs Act;
- reduce the dividend exclusion;
- impose a tax on certain dividends; and
- clarify treaty provisions.
If enacted, the bill would take effect immediately and apply as noted below.
The bill has been sent to Gov. Phil Murphy. However, the governor has threatened to veto the bill.
Surtax on Corporations
The bill would impose a surtax on a corporation’s allocated net income. The surtax would be equal to:
- 2.5% if the corporation has entire net income between $1 million and $25 million; or
- 4% if the corporation has entire net income over $25 million.
The surtax applies for only two years. The first year is the tax year ending on or after January 1, 2018. The second year is the next tax year.
Business incentive credits would not apply against the surtax. However, the bill would allow credits for:
- installment payments;
- estimated payments made with a request for an extension of time for filing a return; or
- overpayments from prior tax years.
The surtax would not apply to public utilities.
Nonconformity with Federal Tax Reform Provisions
The starting point for computing New Jersey’s corporate income tax is federal taxable income. The federal Tax Cuts and Jobs Act of 2017 made numerous changes that affect a corporation’s federal taxable income. New Jersey generally follows federal law, unless a specific adjustment to federal taxable income is required.
With respect to the Tax Cuts and Jobs Act, the bill would create New Jersey corporate income tax adjustments that:
- disallow federal deductions against the repatriation (transition) tax on accumulated foreign earnings (IRC Sec. 965);
- disallow the 20% deduction for qualified business income from a pass-through entity (IRC Sec. 199A); and
- apply the interest deduction limitation (IRC Sec. 163(j)) on a pro-rata basis to interest paid to both related and unrelated parties.
The adjustment for IRC Sec. 965 would apply to tax years beginning after 2016. The adjustments for IRC Sec. 199A and IRC Sec. 163(j) would apply to tax years beginning after 2017.
The bill would reduce the dividend exclusion amount for taxpayers receiving dividends from an 80% or greater owned subsidiary. The exclusion goes from 100% to 95% of the dividends included in federal taxable income.
This change applies to tax years beginning after 2018.
Subsidiary Dividends Tax
The bill would impose a 9% tax on dividends a corporation receives from subsidiaries. The tax would apply to:
- dividends actually paid;
- deemed dividends; and
- all other distributions treated as dividends.
However, the total amount of dividends received would have to be greater than $1 million.
To determine its tax liability, a corporation would use an allocation factor based on:
- New Jersey gross domestic product; over
- total U.S. gross domestic product.
A credit would be available for the amount of franchise tax paid, if any, on the same dividends.
The tax would not be deemed a tax on capital stock or property. It also would not be subject to the addback for taxes paid.
Insurance companies would also owe the tax.
The tax would only apply to tax years beginning after 2016 and ending before 2019. It would have to be paid by May 15, 2019.
Affect of Tax Treaties on New Jersey Tax
Finally, the bill would clarify that New Jersey “entire net income” is generally determined without treaty-based federal:
- deductions; or
An exception would exist if they are expressly made applicable to states under the treaty.
A.B. 4202, as passed by the New Jersey Legislature on June 21, 2018