NJ Extends Net Operating Loss Carryover Rules
Effective for taxable years beginning after June 30, 2009, New Jersey tax law has been amended to expand the circumstances under which New Jersey taxpayers may carry forward net operating losses ("NOLs") to offset profits earned in subsequent tax years. Generally, NOLs are the excess of deductions over gross income used to compute entire net income for New Jersey income tax purposes.
Under prior law, an NOL (whether corporate or individual) could be carried forward to each of the seven taxable years following the year in which such NOL was generated, after which any unused NOL would expire. Under the new law, the carry forward period is extended to 20 years. NOLs may not be carried back to prior tax years for New Jersey tax purposes.
New Jersey law does not permit carry forwards of NOL deductions where there has been a 50% or greater change of ownership in the corporation producing the NOL and such corporation changes the trade or business giving rise to the NOL. Note that this rule is considerably more favorable than the analogous federal net operating loss deduction rule, which limits the use of NOLs whenever there has been a 50% or greater change in stock ownership within a three-year period. On the other hand, the New Jersey statute also provides for potential limitation on the use of NOLs "where the facts support the premise that the corporation was acquired under any circumstances for the primary purposes of the use of its net operating loss carryover." Thus, while a mere purchase of all the stock of a target corporation with unused NOL carry forwards (absent a change in the target's post-acquisition trade or business) will not necessarily limit the ability of such target to continue carrying forward its NOLs for New Jersey corporate net income tax purposes, acquirers of NOL companies should be aware of and protect against, if possible, a potential challenge to any such carry forward, based on the argument that the primary purpose of the acquisition was to utilize the target's NOLs.
This change now brings New Jersey tax law into greater conformity with the federal income tax treatment of NOL carry forwards (and with the rules of neighboring states New York and Connecticut, each of which also permits a 20-year carry forward of NOLs). Practical tax planning considerations dictate that corporate taxpayers with substantial NOLs (e.g., start-up companies with high up-front cash "burn rates" that have not yet begun to generate significant revenue) should carefully analyze the impact of proposed capital-raising transactions, so as to minimize any potentially adverse impact on the NOLs. Professional tax advisers may be able to suggest alternative transaction structures that will meet the need for additional capital without jeopardizing the future availability of such NOLs to offset both federal and state income tax liabilities.
Under a special rule available to "new or expanding emerging technology and biotech" companies operating in New Jersey, such companies are eligible to apply for permission to transfer unused NOLs to other corporate taxpayers, in exchange for certain "private financial assistance" in an amount equal to at least 75% of the transferred NOLs. Under the statute, the New Jersey Economic Development Authority is authorized to approve up to $60 million in annual NOL transfers, and is charged with responsibility for developing criteria for approving or disapproving applications. By granting certain New Jersey-based "high-tech" companies enhanced access to financing sources, this program represents a potentially valuable opportunity for those taxpayers to effectively utilize NOLs that might otherwise expire unused.