The federal stimulus bill (the CARES Act), HR 748, which was signed into law by President Trump on March 27, includes certain corporate income tax provisions designed to provide relief to corporate taxpayers. One such provision–the net operating loss (NOL) provision that allows taxpayers to carryback NOLs to prior years–could have unintended consequences at the state level. For some taxpayers, the carryback of NOLs to 2018 and 2019 could reduce the deductions allowed pursuant to IRC § 250 applicable to global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) generated in those years. While this will obviously have federal income tax consequences it will also have consequences in states that tax GILTI and allow the deductions in IRC § 250. This blog post focuses on the consequences of the NOL rules to the New Jersey Corporation Business Tax (CBT), but the issue could arise in other states, including, for example, Nebraska and Iowa.
The state issue is based on the mechanics of the federal GILTI and FDII deductions computed pursuant to IRC § 250. IRC § 250(a)(1) provides a 50% deduction for GILTI and a 37.5% deduction for FDII. However, IRC § 250(a)(2) then provides that, if the amount of a taxpayer's GILTI and FDII, net of the related IRC § 250 deductions, exceeds the taxable income of the taxpayer determined without regard to the IRC § 250 deductions, then the amount of the IRC § 250 GILTI and FDII deductions will be reduced. In determining "taxable income" for such purposes, a taxpayer has to include its NOLs, so if a taxpayer carries back NOLs and uses them to reduce its taxable income in 2018 and 2019, the amount of the taxpayer's GILTI and FDII deductions could also be reduced.
New Jersey is notorious for being one of the states to tax GILTI. New Jersey includes GILTI computed under IRC § 951A in the tax base, but then allows the IRC § 250 GILTI deduction; as a result, for many taxpayers, New Jersey ultimately taxes 50% of GILTI. While New Jersey does not follow the federal NOL rules, it does specifically link its GILTI deductions to IRC § 250. Accordingly, the carryback of NOLs at the federal level could result in a reduction of the GILTI deduction that the taxpayer can take for New Jersey CBT purposes. As a result, New Jersey could end up taxing far more than 50% of a taxpayer's GILTI. The carryback of NOLs at the federal level could also reduce the amount of the FDII deduction that can be claimed in New Jersey.
As mentioned above, this issue also arises in other states that tax GILTI and tie to the federal IRC § 250 deduction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.