New Jersey has enacted a corporate business tax deduction that mirrors the federal deduction allowed under IRC Sec. 250 relative to income derived from certain foreign assets. Additionally, the enacted legislation:
– modifies dates with respect to dividend exclusion formulas;
– amends certain provisions regarding the tax base and operative dates relating to combined reporting under recently-enacted legislation (TAXDAY, 2018/07/03, S.14);
– adjusts the tax base and provides clarifying definitions with respect to the corporate business tax surtax; and
– clarifies the gross income tax treatment of certain tax credits approved by the New Jersey Economic Development Authority prior to July 1, 2018.
Conformance to IRC Sec. 250
IRC Sec. 250 allows a taxpayer to claim a deduction relative to the tax on shareholders’ global intangible low-tax income (GILTI) and on foreign derived intangible income (FDII). For privilege periods beginning on and after January 1, 2018, taxpayers are allowed a deduction equal to the federal deduction under IRC Sec. 250. However, any deduction is only allowable in computing entire net income to the extent that the relevant income has not been otherwise excluded or exempted under the Corporation Business Tax Act.
“Net Worth” and Dividend Exclusion Modifications
For purposes of determining “net worth” under the corporate business tax, the allowable reduction for investment in capital stock of one or more subsidiaries is reduced to from 100% to 50%.
Additionally, certain operative dates relative to the dividend exclusion are modified by the legislation. For a taxpayer that owns 80% or more of a subsidiary, the dividend received deduction may be claimed at:
– 100% for periods beginning on or before December 31, 2016;
– 95% for periods beginning January 1, 2017, through December 31, 2018 (with three-year average allocation factor relief); and
– 95% for periods beginning on and after January 1, 2019.
Net Operating Losses and Changes in Ownership
The legislation also extends the operative dates to privilege periods ending prior to July 31, 2019 (rather than July 1, 2018), for:
– the net operating loss deduction; and
– the prior net operating loss conversion carryover.
Further, where there is a change in 50% or more of the ownership of a corporation because of redemption or sale of stock and the corporation changes the trade or business giving rise to the loss, no net operating loss sustained before the changes may be carried over to be deducted from income earned after such changes. If the Direction of the Division of Taxation determines that the acquisition was for the primary purpose of taking advantage of the net operating loss carryover, the director may disallow the carryover. However, this provision does not apply between members of a combined group reported on a New Jersey combined return.
Combinable Captive Insurance Companies
Pursuant to the enacted legislation, a combinable captive insurance company, meaning a captive insurer that is more than 50% owned by a single entity and with gross receipts of 50% or less from insurance premiums, is not exempt from the corporate business tax.
Combined Reporting Changes
The effective dates of the combined reporting requirements are extended and are now scheduled to commence for privilege periods ending on and after July 31, 2019 (previously, January 1, 2019). Additionally, for each member of a combined reporting group filing a mandatory or elective New Jersey combined return, the minimum corporate business tax is set at $2,000 for the group privilege period.
Furthermore, required adjustments under the interest expense addback provisions do not apply to transactions between related members included in a combined group reported on a New Jersey combined return.
In addition, the exemption from combined reporting requirements for certain utilities is extended to corporations with respect to rates charged to customers for water and wastewater services.
Corporation Business Tax Surtax Amendments
With respect to the corporation business tax surtax, the legislation provides that “allocated taxable net income” means allocated entire net income for privilege periods ending before July 31, 2019, or taxable net income for privilege periods ending on and after July 31, 2019. Further, the term “taxpayer” is defined as a business entity that is subject to the corporation business tax.
Treatment of Economic Development Authority Credits
Finally, the term “gross income” does not include gains or income from the sale or assignment of a tax credit transfer certificate under the Grow New Jersey Assistance Program, for any sale or assignment of a tax credit approved by the Economic Development Authority on or prior to July 1, 2018, regardless of the date the sale or assignment occurs. This provision is applicable to credits approved prior to July 1, 2018.
Ch. 131 (A.B. 4495), Laws 2018, effective retroactive to January 1, 2018, and applicable as noted