New Jersey Enacts Significant Corporation Business Tax Changes

New Jersey enacted major changes to its corporate business tax that will take effect in 2019, such as post-allocation net operating loss calculations as well as the adoption of market-bases sourcing for services and mandatory combined reporting.

By Jeff Glickman, SALT Partner

Major tax legislation enacted in New Jersey during 2018 made significant changes to the manner in which corporations will compute their New Jersey Corporate Business Tax (“CBT”) liability for the 2019 tax year.[1]  Each of the items discussed below is effective for tax years on or after July 31, 2019 (i.e., beginning on or after Aug. 1, 2018), so corporations with New Jersey operations should begin to address how these changes will impact them.

Post-Allocation Net Operating Loss

New Jersey taxpayers previously computed their net operating loss (“NOL”) on a pre-allocation basis.  Under the new law, NOLs will now be computed on a post-allocation basis.  Therefore, all unused NOLs from tax periods ending before July 31, 2019, must be converted before being carried forward.  This is referred to as the “prior net operating loss conversion carryover” (“PNOLCC”).  The PNOLCC is computed by multiplying the unused NOL amount from each prior tax period ending before July 31, 2019, by the business allocation percentage from the taxpayer’s last tax period ending before July 31, 2019.  Each year’s PNOLCC amount may still be carried forward 20 years from the tax year in which the initial loss occurred and utilized against post-allocation New Jersey taxable income.  To assist taxpayers with the PNOLCC, the state published a special Worksheet 500-P.

Market-Based Sourcing for Services

Continuing the trend followed by many states before it, New Jersey now sources services for purposes of computing the numerator of its sales factor based on where the benefit of the service is received (i.e., the market) as opposed to where the service is performed (i.e., cost-of-performance).   If the benefit of the service is received both at a location within and outside New Jersey, the portion of the sale that is allocated to the state is based on the percentage of the total value of the benefit of the service received at a location in New Jersey or a reasonable approximation thereof.

If a determination cannot be made based on the rule above, then: (i) in the case of an individual customer that is not a sole proprietor, the benefit of the service is deemed to be received at the customer’s billing address, and (ii) for all other customers, the benefit of the service is deemed to be received at the location from which the services were ordered in the customer’s regular course of operations; however, if that location cannot be determined, then the benefit of the service is deemed to be received at the customer’s billing address.

Mandatory Combined Reporting for Unitary Groups

Combined reporting will now be required for a group of corporations (i) having common ownership (i.e., more than 50 percent, direct or indirect), (ii) conducting a unitary business, and (iii) where at least one of the corporations is subject to the CBT.  A “unitary business” means “a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts.”

Notable aspects of the new combined reporting system are as follows:

  • The default reporting method is water’s-edge unless the group’s Managerial Member[2] elects to report on either a worldwide basis or an affiliated group basis. The affiliated group basis would include all affiliated group members (as defined under IRC section 1504), regardless of whether they are conducting a unitary business or are subject to the CBT.  Either election is binding for the tax year and the five succeeding tax years subject to written request to the Director of Taxation to revoke the election for reasonable cause.
  • PNOLCC amounts may only be used to offset the income of the member of the group that incurred the loss. NOLs incurred by a taxable member (i.e., a member of the combined group that is subject to the CBT) filing a combined report may be carried over and shared with other taxable members that were members of the same combined report in the year the loss was incurred.
  • Business income resulting from an intercompany transaction between members of the combined group are deferred in a manner similar to IRS regulation 1.1502-13.
  • The group’s combined net income is allocated to each taxable member according to such taxable member’s sales factor. The denominator of the sales factor is the combined group’s receipts.  The numerator is the taxable member’s receipts sourced to New Jersey.

These changes may have a significant impact on the tax liability of corporations that are required to file a New Jersey CBT return, particularly if such corporations are now required to file on a combined basis.  Aprio’s SALT team has experience with combined returns and market-based sourcing rules, and we can assist taxpayer’s with understanding the potential impact these new laws will have on their New Jersey CBT liability.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the February 2019 SALT Newsletter.

[1] See N.J. P.L. 2018, ch. 48 and N.J. P.L. 2018, ch. 131.

[2] The Managerial Member is the common parent corporation if such corporation is subject to the CBT; otherwise, the group may elect its Managerial Member, which election is binding for ten tax periods.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.