New Jersey Tax Reform Bill Enacted | Spire Group, PC
Despite overwhelming skepticism that it would pass, New Jersey’s Assembly Bill 4202 was written into law on July 1st. Because it was such a striking departure from his proposed tax plan, Governor Phil Murphy indicated he was likely to veto the bill when it was first introduced. After he proposed a few key changes, both Houses concurred with the revised bill and it was written into law as P.L.2018, c.48. The resulting law, while a compromise, still makes some major changes. It (1) introduces a new surtax on corporations; (2) decouples from certain IRS provisions; (3) reduces the dividend exclusion; (4) adopts market-based sourcing; and, (5) requires unitary combined reporting.
The new law imposes a tax on corporations whose net incomes exceed $1 million in one or more of the next four years. In 2018 and 2019, these corporations will pay a 2.5% tax, and in 2020 and 2021, they will pay a 1.5% tax. Once net income reaches the $1 million threshold, the surtax is applied to all net income, not just the amount exceeding $1 million. These rates are in addition to the standard Corporate Business Tax (CBT) rate of 9%, but unlike the CBT standard rate, the surtax cannot be eliminated by the use of credits. Only credits for estimated payments or applied overpayments will be allowed against the surtax.
With the passage of P.L.2018, c.48, the State of New Jersey decouples from some of the Federal provisions introduced in the Tax Cuts and Jobs Act (more on that Federal law can be seen here). In a nut shell, “decoupling” is when a state disallows certain Federal deductions, requiring an adjustment to be made on the state return before determining net income for state tax purposes. New Jersey will require taxpayers to make the following adjustments:
- Add back the 20% qualified business income deduction for pass-through entities;
- Add back any deductions taken against the repatriation tax on stockpiled foreign earnings; and
- Apply the interest deduction limitation on a pro-rata basis to interest paid to both related and unrelated parties.
New Jersey will reduce the dividend exclusion for taxpayers who receive dividends from a subsidiary. Before this law was passed, there was a 100% dividends-received deduction allowed for dividends received from an 80% or greater owned subsidiary. For tax years that begin on or after January 1, 2018, this exclusion will be reduced down to 95%.
Multi-state companies doing business in New Jersey will have new apportionment rules to follow for periods that begin on or after January 1, 2019. The state is moving from a “cost of performance” (COP) method to source service revenues to a “market-based” method. Under COP, service revenues are considered New Jersey-sourced if the services are performed within the state. Under market-based sourcing, service revenues will be considered New Jersey-sourced if the customer receives the benefit of the service within the state.
If the benefit is received both within and without of the state, the service revenue will be determined pro-rata to the benefit received. If the benefit cannot be easily attributed to any one state, then the service can be sourced to the customer’s billing address or where the services were ordered.
Corporations that are members of a business group that (1) has common ownership, and (2) is engaged in a common business, must file on a combined basis after 2018. Explained simply, filing combined is when a group of multi-state entities combines their activities and files as if they were one entity. Historically, states have instituted combined reporting as a way to combat tax avoidance schemes. By reporting combined, the revenues from all of the entities will be included in the state apportionment calculation, which typically increases the apportionment factor and therefore increases state tax revenues.
Because combined reporting is likely to increase the group’s overall deferred tax liability, lawmakers felt the need to provide a deduction to help offset the tax increase, at least for the first few years. The deduction is calculated to be the net change in deferred tax assets and liabilities, and businesses can take it equitably over the next 10 years.
Our Spire Group professionals are here to help you make sense of these new laws. If you have any questions about one of the law’s new changes, give us a call or send us an e-mail. We’re here to assist you in any way that we can.