New Jersey Enacts Technical Corrections and Substantive Changes to This Summer’s CBT Amendments

Summary

On October 4, New Jersey enacted Assembly Bill 4495 (A4495), which implements several changes and technical corrections to Assembly Bill 4202 (A4202), which was signed into law on July 1, 2018.  The enactment of A4202 brought sweeping changes to the New Jersey Corporation Business Tax (CBT) law.  See our Tax Alert issued in July 2018 for more insight into A4202.

All provisions of A4495 apply to privilege periods (e.g., tax years) beginning on or after January 1, 2018, unless otherwise noted.  Among other significant changes, A4495 accelerated New Jersey’s effective date for mandatory unitary combined reporting and market-based sourcing.

 

Details

The technical corrections, clarifications and substantive changes enacted in A4495 are summarized as follows:

• The effective date of mandatory “water’s-edge” unitary combined reporting is accelerated and now applies to tax years ending on or after July 31, 2019.
• The combined net operating loss (NOL) carryforward rules apply to tax years ending on or after July 31, 2019. The state’s new “prior net operating loss” (PNOL) is modified by defining PNOL as a “net operating loss incurred in a privilege period ending prior to July 31, 2019 and converted from a pre-allocation NOL to a post-allocation NOL” (i.e., post-apportionment NOL).
• An existing provision which limits the carryforward of PNOL when there is a change in ownership greater than 50 percent will not apply when the ownership change is among members of a New Jersey combined reporting group.
• The effective date of market-based sourcing is also accelerated and now applies to tax years ending on or after July 31, 2019.
• The definition of “combined group” is expanded to include “all business entities” as opposed to just corporations.
• The CBT minimum tax is set at $2,000 and applies on an individual basis to each member of a combined reporting group.  The minimum tax is applied to entities both with and without CBT nexus.
• The CBT surtax is clarified to apply to “allocated entire net income” (apportioned net income) of taxpayers with entire net income (ENI) over $1 million.  The surtax rate is 2.5 percent in tax years 2018 and 2019, and 1.5 percent for tax years 2020 and 2021.  It is unclear at this point whether, in a combined report, the $1 million threshold is applied to each member separately or to the allocated (apportioned) entire net income of the combined group.
• The addition modification for intercompany payments of intangible and/or interest expenses do not apply to transactions between members that are included in the same New Jersey combined group.
• A combinable captive insurance company will not be exempt from the CBT.  New Jersey defines a “combinable captive insurance company” as an entity that is more than 50-percent owned, either directly or indirectly, by a single entity and with gross receipts of 50-percent  or less from insurance premiums.
• A4202 reduced the dividend exclusion from ENI for dividends received from an 80-percent or more owned subsidiary from 100 percent to 95 percent for tax years beginning after December 31, 2016. In addition, A4202 required that for 2017 only, when calculating the tax liability owed for the deemed dividends included in ENI, a taxpayer was to use the lower of (1) its three-year average allocation factor for the 2015 through 2017 tax years or (2) 3.5 percent.  A4495 extends the use of this special allocation (apportionment) to tax years beginning after December 31, 2016, and before January 1, 2019.  A4495 also adjusts the special allocation (apportionment) factor to use the three-year average allocation (apportionment) factor for the 2014 through 2016 tax years.  The dividend exclusion and special apportionment formula described above applies to any repatriated income under IRC Section 965 and is to be reported on the newly released CBT-DIV schedule, which is due by January 31, 2019, or within 30 days of an extension, whichever is later. 
• A4495 reverses the change in NOL and dividends received deduction (DRD) ordering rules that was enacted with A4202.  The requirement that NOLs must be used to reduce ENI before applying the DRD are now restored.  Furthermore, A4495 states that any ENI below $0 that is the result of a DRD may not be carried forward to future tax years.  
• For tax years beginning on or after January 1, 2018, New Jersey will allow any deductions under IRC Section 250.  This includes the deductions for Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII).  Deductions are only allowed to the extent that any GILTI income under IRC Section 951A has been included in ENI. 
• The Deferred Tax Asset Deduction that is afforded to public companies that see either a decrease in deferred tax asset or increase in deferred tax liability due to the switch from separate to combined reporting is clarified to apply to taxpayers who file on a water’s-edge basis or those taxpayers that elect to file a worldwide or affiliated group return.
• The definition of “Gross Income” for purposes of the Gross Income tax will not include income from the sale or assignment of tax credit transfer certificates awarded after July 1, 2018, regardless of when the tax credits are sold or assigned.  

 

BDO Insights

• The enactment A4495 provides clarity to taxpayers on a number of items; however, the technical corrections and changes also raise some new questions, while adding a layer of complexity to the sweeping changes enacted with A4202. 
• Taxpayers should note that while A4495 does provide for the inclusion of GILTI income in the CBT base, it does not address whether or how taxpayers report GILTI in the receipts factor for purposes of apportionment.  The Division of Taxation may provide further guidance, but the nature and timing of such guidance is unknown. 
• Taxpayers should evaluate their CBT profile after the enactment of A4202 and A4495 and plan for its impact with respect to their New Jersey activities and tax return filings in 2017, 2018, 2019, and future tax years.
• Taxpayers affected by A4495 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.