New Jersey Makes Substantial Changes to the Corporation Business Tax
On July 3, 2023, New Jersey Governor Phil Murphy signed into law S.B. 3737 / A.B. 5323 (the “Bill”), which makes significant changes to the Corporation Business Tax (“CBT”). Some of the most noteworthy changes are summarized below.
Effective for privilege periods ending on or after July 31, 2023:
- Adoption of a Bright-Line Threshold for Economic Nexus. A non-New Jersey corporation will be deemed to have substantial nexus with New Jersey if it derives New Jersey receipts in excess of $100,000 or has 200 or more separate transactions delivered to customers in New Jersey during the taxable year. This bright-line nexus standard is in addition to traditional nexus standards, which continue to apply.
- Adopts Finnegan Method of Combined Reporting. New Jersey will move from a Joyce to a Finnegan method of combined reporting. Under the Finnegan method, the numerator of the New Jersey receipts factor includes all New Jersey receipts derived from members of the combined group, regardless of whether that member is subject to tax in New Jersey.
- Repeals the Intercompany Interest and Royalty Payment Addback Provisions. Corporations will no longer be required to add intercompany interest and royalty payment back to income.
- Treats GILTI as a Dividend. Global intangible low-tax income (“GILTI”) is now treated as dividend income and is therefore eligible for the dividend exclusions set forth in N.J.S.A. § 54:10A-4(k)(5).
- Changes the NOL Sharing Rules for Combined Groups. Unused and unexpired prior net operating loss conversion carryovers of individual members of the combined group may be shared by the combined group. Unused and unexpired net operating losses (“NOLs”) of members of the combined group may also be shared by the combined group.
- Includes New Entities in Combined Group. Captive real estate investment trusts (“REITs”), investment companies (“ICs”), and regulated investment companies (“RICs”) are included in the combined group and taxed as C corporations. There is an exclusion from this rule for REITs, ICs, and RICs that are at least 50 percent owned or controlled by a state or federally chartered bank, savings bank, or savings and loan association with assets of $15 billion or less.
- Expands the Definition of a Unitary Business. Changes the definition of a unitary business from a group of business entities under common ownership “that are sufficiently interdependent, integrated, and interrelated through their activities” to “a group of businesses that are sufficiently interdependent, integrated, or interrelated through their activities . . . .”
- Allows Adjustment of Closed-Year NOLs. The Director may make adjustments to NOLs for closed years up to 10 years after the return claiming the NOL was filed.
The amendments highlighted above are just some of the many changes the Bill makes to the CBT. Other amendments relate to New Jersey’s treatment of the I.R.C. § 163(j) limitation, the taxation of the income of non-U.S. corporations, the definition of New Jersey water’s edge group, the calculation of taxable income and ordering of certain deductions, and clarification of CBT return due dates, among other topics. The Bill is also notable for something it did not do - it did not extend the 2.5 percent CBT surtax beyond 2023.
This update is one in a series of updates written for the July 2023 edition of The BR State + Local Tax Spotlight.