New Jersey Business Tax Reform Act of 2002
- New Jersey Business Tax Reform Act of 2002
- July 1, 2002
- Robert C. Daleo
- Area(s) of Practice:
- Closely-held Businesses, Corporate Law, Tax Law
On July 2, 2002, legislation was enacted that substantially amends and changes the New Jersey Corporation Business Tax Act ("CBT"), significantly changing New Jersey's system of taxing corporations and other business entities. Substantially all of the changes apply to tax years beginning on and after January 1, 2002. The following is a brief description of the more significant provisions contained in the new legislation: ALTERNATIVE
Generally. The legislation establishes a new alternative minimum assessment ("AMA"). Taxpayers subject to the CBT will now be required to pay the greater of the standard CBT liability or the AMA. It should be noted that the definition of "corporation" was expanded to include any entity that is classified as a corporation for federal income tax purposes. In addition, foreign corporations that merely solicit business in the State of New Jersey are required to pay the AMA despite being exempt from the CBT pursuant to federal law (Public Law 86-272 bars state income taxation of interstate businesses whose only contact or nexus with the taxing state is merely the solicitation of orders for sales of tangible personal property).
Excluded Businesses. The AMA does not apply to New Jersey S corporations (i.e., S corporations that have affirmatively filed a valid election to be a New Jersey S Corporation with the New Jersey Division of Taxation), investment companies, professional corporations or certain entities operating on a cooperative basis for federal tax purposes.
Election of Gross Profits vs. Gross Receipts. The AMA will be computed either on gross profits or gross receipts. The taxpayer elects which methodology to use. Once an election is made, the taxpayer must continue to compute the AMA using the same methodology for that year and the next 4 taxable years. Therefore, taxpayers should carefully examine which methodology would result in the most favorable outcome for a 5-year period.
Gross Profits Calculation. For purposes of the AMA, "gross profits" is defined as New Jersey gross receipts reduced by returns and allowances attributable to New Jersey gross receipts, minus the cost of goods sold. The AMA with respect to gross profits is calculated as shown in Table A:
|If Gross Profits are:||AMA is:|
|$1 million or less||No AMA|
|More than $1 million but not over $10 million||.0025 times gross profits in excess of $1 million multiplied by 1.11111|
|More than $10 million but not over $15 million||.0035 times gross profits|
|More than $15 million but not over $25 million||.006 times gross profits|
|More than $25 million but not over $37.5 million||.007 times gross profits|
|More than $37.5 million||.008 times gross profits|
Gross Receipts Calculation. For purposes of the AMA, "gross receipts" are generally receipts from sources earned within New Jersey. The AMA with respect to gross receipts is calculated as shown in Table B:
|If Gross Receipts are:||AMA is:|
|$2 million or less||No AMA|
|More than $2 million but not over $20 million||.00125 times gross receipts in excess of $2 million multiplied by 1.11111|
|More than $20 million but not over $30 million||.00175 times gross receipts|
|More than $30 million but not over $50 million||.003 times gross receipts|
|More than $50 million but not over $75 million||.0035 times gross receipts|
|More than $75 million||.004 times gross receipts|
Limits to AMA Liability. The AMA is capped at $5 million per taxpayer per period. If five or more taxpayers are members of an affiliated group, the group's AMA is capped at $20 million. In addition, even though there is no AMA on gross profits of $1 million or less or gross receipts of $2 million or less, an affiliated group is generally limited to a total of $5 million in untaxed gross profits or $10 million in untaxed gross receipts.
Carryforward To the extent the AMA exceeds CBT liability for any year, such excess shall be allowed as a credit to reduce the CBT liability in future periods, but in no event can the credit reduce the CBT liability for a future period to less than the AMA, 50% of the CBT otherwise due or the minimum franchise tax.
Sunset. The AMA sunsets for tax periods beginning after June 30, 2006, however, this does not apply to taxpayers exempt from the CBT under Public Law 86-272. Such taxpayers have the option of consenting to pay the standard tax pursuant to the CBT or continuing to pay the AMA.
Payment on Behalf of Nonresident Owners. Entities that are classified as partnerships for federal income tax purposes (including limited liability companies and limited partnerships), other than those listed on a United States national stock exchange or qualified investment partnerships, with nonresident partners must withhold and pay tax on such partner's share of partnership income allocated to New Jersey. The partnership will pay tax at a rate of 9% on each nonresident corporate partner's share of partnership income allocated to New Jersey and 6.37% on each nonresident noncorporate partner's share of partnership income allocated to New Jersey. A "nonresident noncorporate partner" means an individual, an estate or a trust subject to taxation pursuant to the New Jersey Gross Income Tax Act, that is not a resident taxpayer or a resident estate or trust under that act. A "nonresident corporate partner" means a partner that is not an individual, an estate or a trust subject to taxation pursuant to the New Jersey Gross Income Tax Act that is not a corporation exempt from tax pursuant to the CBT, and that does not maintain a regular place of business in New Jersey other than a statutory office. A "partner" is an owner of an interest in the partnership, in whatever manner that owner and ownership interest are designated. Any tax payments made in this regard will be credited to a separate account for each partner based upon the partner's share of allocated income and tax rate applied.
Return Processing Fee. Entities classified as partnerships for federal income tax purposes with income derived from New Jersey sources and more than two owners must pay a filing fee of $150 per owner. Similarly, professional corporations with more than two licensed professionals must pay a filing fee of $150 per licensed professional. Each entity's filing fees are capped at $250,000 per tax period. Entities must submit the filing fees with their return plus an additional 50% as an installment payment toward the next year's filing fee.
Minimum CBT Payment Increased. The legislation increased the minimum CBT liability from $210 annually to $500 annually for tax periods beginning in 2002 and later, except for taxpayers (1) that are members of an affiliated or controlled group, and (2) whose group has total payroll of $5 million or more, in which case the minimum CBT liability will be $2,000 annually.
New Jersey Subchapter S Corporation Tax Phase-Out Suspended. The phase-out of the tax on New Jersey S corporations is suspended. The tax is now 1.33% for tax periods commencing on or after July 1, 2001 and ending on or before June 30, 2006. The rate will drop to 0.67% for periods beginning on or after July 1, 2006 and ending on or before June 30, 2007. For periods ending after June 30, 2007, the rate is 0%. Previously, the tax on New Jersey S corporations was scheduled to be phased out for periods ending after June 30, 2003.
Net Operating Loss Suspension. The use of net operating losses (NOLs) will be suspended for tax periods beginning in calendar years 2002 and 2003. However, the carryover period allowed for NOLs will be extended for 2 years to compensate for the suspension.
Acceleration of Estimated Payment. For taxpayers with gross receipts of $50 million or more, the new legislation accelerates the third quarter payment of estimated tax to the second quarter for tax periods beginning on or after January 1, 2003. This results in a 50% payment for the second quarter for such taxpayers.
Disallowed 30% "Bonus" Depreciation. The deduction of the 30% "bonus" depreciation established for certain property for federal income tax purposes under the "Job Creation and Workers Assistance Act of 2002" may not be taken for CBT purposes.
LOOPHOLE CLOSERS AND TAX BASE CHANGES
Throwout Rule. Taxpayers that maintain a regular place of business outside of New Jersey other than a statutory office utilize a three-factor apportionment formula composed of property, sales and payroll fractions to determine the portion of the taxpayer's income that is taxable by New Jersey. Under the formula, the sales factor is the most heavily weighted factor (weighted 50%). To the extent more sales, property and payroll are attributable to jurisdictions other than New Jersey, less income is allocated to New Jersey and the amount of CBT liability is reduced. In certain circumstances, receipts attributable to other jurisdictions may not be subject to tax since the jurisdiction may not impose a tax on the income or the jurisdiction may not constitutionally impose a tax. Under the legislation, the apportionment formula has been revised to eliminate receipts from the denominator of the sales fraction that are attributable to jurisdictions in which the taxpayer is not subject to tax measured by profits, income, business presence or business activity. This change in the formula could result in a larger sales fraction and ultimately, greater CBT liability. The additional tax liability for affiliated groups or controlled groups as a result of the throwout is limited to $5 million per tax period.
Disallowance of Interest Expense Deduction. The new legislation disallows the deductibility of interest paid to certain related parties subject to limited exceptions. The legislation is intended to prevent companies from reducing their taxable profits in New Jersey by making loans to affiliates or related parties in states with lower tax rates.
Disallowance of Intangibles Expense Deduction. The legislation disallows the deduction of royalties and other intangible expenses and costs when paid to certain related parties. Similar to the disallowance of interest deductions, there are limited exceptions to this rule.
Dividends Received Deduction. Taxpayers may exclude from income 100% of dividends received from companies in which the taxpayer has an ownership interest of at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the shares of all other classes except nonvoting stock which is limited and preferred as to dividends. Taxpayers with an ownership interest of at least 50% (calculated in the same manner as in the preceding sentence) but less than 80% may exclude 50% of the dividends received from income. Taxpayers with an ownership interest of less than 50% must include 100% of dividends as income.
Investment Companies. Investment companies will now pay tax on 40% of their net income, up from 25%.
Deduction for Taxes Paid to Foreign Nations Disallowed. The legislation disallows a deduction for taxes paid to any foreign country, state, province, territory or subdivision thereof.
Savings Institutions. Savings institutions will now be subject to the CBT. Savings institutions are state or federally chartered building and loan associations, savings and loan associations and savings banks.
Nonoperational Income. Nonoperational income is not allocated but is specifically assigned. If the taxpayer's headquarters is in New Jersey, all nonoperational income shall be specifically assigned to New Jersey.
SMALL BUSINESS ASSISTANCE
Rate Reduction for Small Businesses. To assist small business owners, the legislation reduces the CBT rate from 7.5% to 6.5% for businesses with $50,000 or less of net income.
New Jobs Investment Tax Credit. The New Jobs Investment Tax Credit has been expanded to include "mid-size business taxpayers" (taxpayers with an annual payroll of less than $5 million and annual gross receipts of less than $10 million) and the value of the new jobs factor has been doubled.
Consolidated Returns. Although businesses that are part of a controlled or affiliated group must continue to file separate returns for each business entity, the Director of the New Jersey Division of Taxation has been given the right to require a consolidated New Jersey filing if the Director determines that a consolidated filing will result in a more accurate reporting.
Payments to Members of an Affiliated or Controlled Group in Excess of Fair Compensation. The new legislation provides that net income shall be determined by eliminating payments to members of an affiliated or controlled group that are in excess of "fair compensation."
Statute of Limitations Suspension. The filing of a complaint in the New Jersey Tax Court suspends the running of the statute of limitations for the contested issue(s) for all subsequent tax periods even where the subsequent years are not the subject of the litigation. The changes contained in the new legislation substantially change the manner in which businesses will be taxed. If you have any questions concerning how this legislation impacts your business, please contact any of the members of the Riker Danzig Tax and Trusts & Estates Group.