New Jersey Enacts Changes to Corporation Business Tax

New Jersey has made changes that will substantially impact many taxpayers.

Recently signed budget bills A.B. 4295 and A.B. 5323 directly affect several New Jersey Corporation Business Tax (CBT) regime provisions. The bills adopt changes including:

The elimination of the separate state S corporation election
An economic nexus standard
Modifications to the NOL calculation
The treatment of GILTI as a dividend eligible for exclusion
The adoption of Finnigan in sales factor sourcing

Elimination of Separate New Jersey S Corporations Election

For tax years or privilege periods beginning on or after December 22, 2022, taxpayers who have made an S election for federal tax purposes are no longer required to make a separate New Jersey S corporation election for New Jersey CBT purposes.

The business must be registered as a corporation with the New Jersey Division of Revenue and Enterprise Services (DORES) and provide proof of its federal S corporation status. Shareholders must also submit verification of consent to the entity’s New Jersey tax treatment.

For returns from tax years or privilege periods beginning before December 22, 2022 to be accepted as New Jersey S corporation returns, taxpayers must make a retroactive New Jersey S corporation election. Otherwise, these entities will be taxed as C corporations for those periods.

New Jersey C Corporation Status Election

Under the new legislation, taxpayers can opt out and elect to be treated as a hybrid corporation, such as an S corporation for federal tax purposes but a New Jersey C corporation for CBT purposes. This election, known as the C Corporation Status Election, does not require any formal notification to be sent to the state. However, the C Corporation Status Election does require:

100% consent of the S corporation shareholders on the election date. Consent is not submitted to the Division of Taxation but must be retained by the taxpayer and provided to the Division of Taxation or DORES if requested.
Estimated payments be made as though the entity were a C corporation and then timely filing of the applicable Corporation Business Tax (CBT) return, other than Form CBT-100S, indicating that the entity is a hybrid corporation in the appropriate section of the return (page 1 of Form CTR-100 or on the Members and Affiliates Schedule portion of Form CBT-100U).
Filing of the applicable CBT return, other than Form CBT-100S, by the due date or extended due date, indicating that the entity is a hybrid corporation in the appropriate section of the form.

The C Corporation Status Election may be made for any tax year at any time during the preceding tax year, on or before the due date or extended due date of the S corporation’s tax return.

The election can be revoked if the shareholders holding more than 50% of the share of stock of the federal S corporation consent to the New Jersey S corporation status.

If this revocation is made on or before the 15th day of the third month of the privilege period, it is effective on the first day.

If made after that, it is effective during the following privilege period.

In 2019, New Jersey adopted mandatory combined reporting for unitary affiliated groups of C Corporations. S Corporations considering a New Jersey C Corp election should consider the impacts of mandatory combined reporting among related entities treated for New Jersey purposes as C Corporations.

Economic Nexus Standard

Effective for tax years or privilege periods ending on or after July 31, 2023, corporations with New Jersey-sourced receipts of more than $100,000 or 200 or more separate transactions delivered to New Jersey customers during the fiscal or calendar year will be deemed to have substantial nexus. If this happens, those corporations are subject to the CBT.

Expanded List of Unprotected Activities under P.L. 86-272

Effective for privilege periods ending on and after July 31, 2023, New Jersey will apply new guidelines in TB-108, providing that certain post-sale activities will now create nexus for CBT purposes.

Becoming the second state to formally adopt the Multistate Tax Commission’s P.L. 86-272 guidelines on internet activities, New Jersey has stated that activities such as providing post-sale customer assistance through chat or email, placing internet cookies on customer’s devices, and soliciting and receiving applications for credit cards and other financial products from customers now exceed such protections.

More consideration should be given to companies doing business in New Jersey and conducting activities over the Internet.

Dividend Exclusion Rule

For privilege periods ending on or after July 31, 2023, the CBT exclusion for dividends and deemed dividends received from an 80% or greater owned C corporation subsidiary increased from 95% to 100%. The 50% exclusion for dividends received from a 50% or greater (but less than 80%) owned subsidiary remains unchanged. However, 5% of the dividend amount will be treated as a deemed expense disallowance and require addback.

Net Operating Loss (NOL) Calculation

For tax years or privilege periods ending on or after July 31, 2023, New Jersey made significant modifications in the calculation of NOLs for CBT purposes:

The priority for deducting the dividend received exclusion (DRE) has been changed. Taxpayers may secure the deduction of the DRE before they deduct NOLs.
The bill limits the New Jersey annual NOL deduction to 80% of taxable income, conforming to the federal NOL carryforward limitations under IRC Section 172(a)(2).
Combined group members are now allowed to share any unexpired prior NOLS among members of the combined group.

Global Intangible Low-Taxed Income (GILTI)

GILTI will be treated as a dividend for New Jersey CBT purposes, subject to the dividend exclusion rules outlined above, effective for tax years or privilege periods ending on or after July 31, 2023.

The New Jersey Division of Taxation has issued guidance for privilege periods ending on or after July 30, 2023, in TB-110. The Division of Taxation has also issued additional guidance for privilege periods ending before July 31, 2023, in TB-88(R) and TB-92(R), the exclusions of double inclusion of GILTI as well as the inclusion of net GILTI related amounts in the numerator of the New Jersey allocation factor.

Research and Experimental Expenses

New Jersey has decoupled from the IRC Section 174 amortization requirement for research and experimental expenditures. This ruling allows a current year deduction in the same year the New Jersey research and development tax credit is secured. This is effective for tax years or privilege periods beginning on or after January 1, 2022.

Adoption of Finnigan Method for Combined Reporting and P.L. 86-272 Analysis

For tax years or privilege periods ending on or after July 31, 2023, members of the combined group must compute their receipts apportionment factor under the Finnigan method. This means the combined group will now include New Jersey receipts in the sales factor numerator of all members, regardless of whether that member has nexus in the state.

Likewise, under the Finnigan method, a combined group cannot claim P.L. 86-272 protection if one group member engages in activities that are not protected by or exceed the protections of P.L. 86-272.

Water’s Edge Group

Effective for tax years or privilege periods ending on or after July 31, 2023, foreign entities (non-U.S. corporations) are included in a water’s edge group to the extent of their effectively connected income not protected by a tax treaty. Receipts excluded from taxable income are also excluded from the New Jersey apportionment formula. The New Jersey Division of Taxation has released further guidance regarding combined filing methods in TB-109.

New Entities Included in Combined Group

Before the bill’s enactment, real estate investment trusts (REITs), New Jersey investment companies, and regulated investment companies (RICs) were excluded from a New Jersey combined group.

Effective for tax years or privilege periods ending on or after July 31, 2023, these entities meeting the statutorily enumerated definition of “captive” are included in a New Jersey combined group, disallowing the special apportionment treatment and deductions that were previously allowed.

However, if one of these entities is owned at least 50% by a bank having assets of no more than $15 billion or does not meet the definition of captive, then it is still excluded from the combined group.

Intercompany Payment of Interest

The addback for interest made to affiliated parties is no longer applicable for tax years or privilege periods ending on or after July 31, 2023. These payments are now deductible in computing taxable income without determining whether an add-back exception would apply.

IRC Section 163(j) Limitation

Beginning with tax years or privilege periods ending on or after July 31, 2022, New Jersey conforms to the Federal regulations on the treatment of IRC Section 163(j). Accordingly, the members included in a combined return are treated as if the filing members filed a consolidated return for purposes of the IRC Section 163(j) business interest limitation.

Next Steps for New Jersey Corporate Tax Changes

The changes made by the state of New Jersey will significantly impact corporations moving forward. Understanding how these changes will impact your organization, even if not physically located in the state, is essential.

Working alongside a trusted advisor specializing in state and local income tax law and compliance can help you make sense of these and other changes.