On July 1, 2018, New Jersey Governor Phil Murphy signed into law a new budget (the Budget). The Budget brings about a number of changes to the New Jersey corporation business tax (CBT), which affect businesses taxed as “C” corporations. The following is a summary of those significant changes.
- Surtax for Certain Corporations - A new surtax is imposed on “C” corporations with more than $1 million in entire net income for years 2018-2021. For years 2018-2019, these corporations will be required to pay a surtax of 2.5%, resulting in a CBT tax rate of 11.5%. For years 2020-2021, the surtax is reduced to 1.5%, resulting in a CBT tax rate of 10.5%.
- Combined Reporting - Beginning on January 1, 2019, New Jersey will require unitary-combined reporting, i.e., companies that are members of a “combined group” will be required to calculate their taxable income together. The definition of a “combined group” includes companies with more than 50% common ownership and are engaged in a “unitary business.” A “unitary business” is a single economic enterprise and may be interpreted by the New Jersey Division of Taxation as broadly as permitted by the U.S. Constitution.
- Market Sourcing for Sales of Services - Prior to the enactment of the Budget, New Jersey receipts from the sale of services were sourced based on the location of the services. Under the market-based sourcing system, beginning on January 1, 2019, receipts from the sale of services are sourced based on where the benefit of the services is received. If the benefit is received in multiple locations, an allocation of the benefit is made. If the state where the benefit is received cannot be determined, certain default rules apply.
- Reduction in Dividends Received Deduction - The dividends received deduction is a tax deduction for corporations that receive dividends from related companies. Under prior law, a corporation that received a dividend from an 80% owned subsidiary was permitted to deduct 100% of that dividend. For periods beginning after December 31, 2016, this deduction is reduced to 95%.
- Amnesty - Another important change made by the Budget, which will impact New Jersey corporations, is the institution of a 90-day tax amnesty period. During the amnesty, any taxes originally due between February 1, 2009, and September 1, 2017, are only subject to 50% of the interest due, and all late payment penalties will be waived (with the exception of civil fraud and criminal penalties). The Division of Taxation has yet to announce when the amnesty period will begin but the program will end on or before January 15, 2019.
The list above only provides a brief outline of some of the many tax and accounting changes made by Governor Murphy’s 2018-2019 Budget. For more information and guidance on the tax changes coming to New Jersey, please contact the attorneys in Parker McCay’s corporate department.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.