The New Jersey Division of Taxation (the "Division") has released long-awaited guidance concerning the recent statutory amendments to the Corporation Business Tax ("CBT").1 Those amendments include provisions involving federal tax reform and New Jersey's switch from separate-company to combined reporting. (Our prior coverage of the legislative amendments is available via our alerts.) Although the Division's new guidance largely follows the text of the amended statute, there are a number of key takeaways.
Surtax. Taxpayers whose apportioned taxable net income exceeds $1 million must pay a new surtax of 2.5% for 2018 and 2019 and 1.5% for 2020 and 2021.2 Under the plain language of the statute, "any business entities" subject to CBT are liable for the surtax, which could potentially include partnerships and S corporations. In TB-84, however, the Division clarifies that the surtax does not apply to either partnerships or S corporations.3
Addback for related-party interest and royalties. Under prior law, a deduction for related-party interest and royalty expense was allowed as long as the affiliate was located in a foreign country with a tax treaty with the United States.4 But the Legislature limited this so-called treaty exception by requiring the affiliate to pay tax on the income stream at an effective tax rate within 3% of the payor's New Jersey effective tax rate.5 As a result of the new surtax, the maximum statutory CBT tax rate in New Jersey is 11.5% for 2018 and 2019.6 If the 3% safe harbor for purposes of the treaty exception were applied to the payor's effective tax rate with the surtax, certain taxpayers might not have been able to qualify for the addback exception. But TB-84 clarifies that the surtax is not considered in applying the treaty exception. Specifically, the Division states that the income stream of the foreign affiliate must be taxed at an effective tax rate equal to or greater than 6%.7
Addback of foreign source income. Earlier this year, the Tax Court of New Jersey ruled that a foreign corporation is not subject to CBT on foreign-source income or income excluded from federal income tax based on a treaty.8 The recent CBT amendments sought to reverse this ruling by computing the CBT tax base without regard to "any exemption or credit allowed in any law of the United States imposing any tax on or measured by the income of corporations."9 In TB-84, the Division notes that taxpayers must add back all income that is exempt under any law of the United States to their entire net income.10 A treaty is arguably not a "law of the United States," however, and the bulletin does not address the New Jersey treatment of income excluded from federal income tax based on a treaty. Based on New Jersey case law, taxpayers should not addback such income for purposes of computing their CBT.
Research credit not refundable. New Jersey provides a credit for conducting research activities within the state and the new legislation states that for "privilege periods beginning on or after January 1, 2018" the research credit "shall not be refundable."11 This led some taxpayers to believe that the research credit was refundable for periods before 2018. In TB-84, however, the Division clarifies its position that the research credit was never refundable and that the credit continues to be nonrefundable under the amended statute.12
Federal tax reform guidance. Two changes brought about by the Tax Cuts and Jobs Act ("TCJA") concern global intangible low-taxed income ("GILTI") and the interest deduction limitation in I.R.C. § 163(j). With TB-84, the Division has provided further guidance on its treatment of GILTI and the section 163(j) limitation. Specifically, the Division states that it will not treat GILTI as a dividend.13 Therefore, taxpayers will not be able to offset their GILTI inclusion with a dividend received deduction. Although the Division did not indicate whether factor representation will be allowed for the GILTI inclusion, taxpayers ought to consider including their pro-rata share of the CFC's receipts in the sales fraction.
Regarding the business interest expense deduction limitation under I.R.C. § 163(j), taxpayers will need to wait for additional guidance for how to allocate the limitation between members of a combined group. In TB-84, the Division merely states that it will post additional information to its website as soon as it becomes available.14
What's next? TB-84 makes clear that more guidance is forthcoming. So taxpayers should watch for further updates from the Division. For more information on the recent CBT amendments, see our prior coverage.
- See New Jersey, Division of Taxation, Corporation Business Tax, Technical Bulletin 84 (Issued Dec. 10, 2018) (hereinafter "TB-84"). A copy TB-84 is available here.
- See N.J.S.A. 54:10A–5.41.
- See TB-84, Surtax, p. 2.
- See N.J.S.A. 54:10A–4(k)(2)(I) (as in effect prior to P.L. 2018, c.48).
- See id. (as amended by P.L. 2018, c.48).
- See N.J.S.A. 54:10A–5.41.
- See TB-84, Treaty Exceptions, p.2.
- See Infosys Limited of India Inc. v. Director, Division of Taxation, 2017 WL 5907704 (Nov. 28, 2017), aff'd on reconsideration, 2018 WL 1385844 (N.J. Tax March 19, 2018). For our previous coverage of Infosys, see our prior alerts.
- N.J.S.A. 54:10A–4(k)(2)(A).
- See TB-84, Miscellaneous Major Changes, p. 3.
- N.J.S.A. 54:10A–5.24b. (flush language).
- TB-84, Research and Development Credit, p. 3.
- See TB-84, GILTI and FDII, p. 2.
- See TB-84, IRC § 163(j) Limitation Method, p. 2.
Originally published 12 December 2018
This article is presented for informational purposes only and is not intended to constitute legal advice.