Source: https://www.thetaxadviser.com/issues/2019/mar/tax-reform-garden-state.html
Timestamp: 2020-04-10 08:50:32
Document Index: 767288249

Matched Legal Cases: ['§33', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§54', '§163']

By Michael J. Bryan, Philadelphia, and Jeremy Sharp, Washington
The year 2018 saw unparalleled change in state tax. As the ramifications of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, began to be understood at the state level, the U.S. Supreme Court decision in South Dakota v. Wayfair Inc., 138 S. Ct. 2080 (2018), provided additional uncertainty. Added to this, some states, including New Jersey, enacted foundational changes to their specific state tax regimes. In 2018, the New Jersey Legislature enacted two bills (Assembly Bills A4202 and A4495) that fundamentally altered the state's taxing structure. This discussion summarizes some of the important changes impacting the New Jersey corporation business tax (CBT) and when these changes took effect or will become effective.
The New Jersey combined group
The most significant change to the CBT arising from the 2018 New Jersey legislation is the state's pending shift to mandatory unitary combined reporting. Effective for privilege periods ending on or after July 31, 2019 (A4202, §33), New Jersey will require the determination of taxable income on a combined basis for unitary members of an affiliated group (N.J. Stat. §§54:10A-4.6 and 4.8(a)). A privilege period is the calendar or fiscal accounting period for which a tax is payable (N.J. Stat. §54:10A-4(j)).
Combined group definition: Under the enacted provisions, "combined group" is defined as a group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax in New Jersey (N.J. Stat. §54:10A-4(z)). In turn, "common ownership" is defined to mean that "more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether or not the owner or owners are members of the combined group." The determination of whether voting control is indirectly owned is determined in accordance with Internal Revenue Code (IRC) Sec. 318 (N.J. Stat. §54:10A-4(aa)). Finally, "unitary business" is defined as "a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts." The new statute further provides that a "'[u]nitary business' shall be construed to the broadest extent permitted under the Constitution of the United States" (N.J. Stat. §54:10A-4(gg)).
Water's-edge default: A "water's-edge" methodology will be the default method for determining composition of a New Jersey combined group. (As this item discusses later, worldwide and affiliated group elections are also available.) Under the water's-edge methodology, commonly owned unitary members incorporated in the United States are included in the group. Also included in the combined group will be: (1) commonly owned unitary members, wherever incorporated or formed, with at least 20% of property and payroll located in the United States, the District of Columbia, or any U.S. territory or possession during the privilege period; (2) any member that earns more than 20% of its income, directly or indirectly, from intangible property or related service activities that are deductible against the income of other members of the combined group; and (3) each member that has income and has "sufficient nexus" in New Jersey (N.J. Stat. §54:10A-4.11(a)). It is noteworthy that the combined group can include a captive insurance company, as defined in the statute (N.J. Stat. §54:10A-4(y)). The new provisions also provide an "80/20" rule, requiring exclusion from the New Jersey group of members with 80% or more of their payroll and property outside the United States, the District of Columbia, and any territory or possession of the United States during the privilege period (N.J. Stat. §54:10A-4.11(a)(1)).
Calculation of combined income: In computing the allocation factor for a combined group filing a water's-edge return, the "taxable member shall use the combined group's denominator," and the numerator shall only include "that taxable member's receipts assignable to this state" (N.J. Stat. §54:10A-4.7(a)), i.e., a Joyce methodology (Appeal of Joyce, Inc., No. 66-SBE-070 (Cal. St. Bd. of Equal. 11/23/66)). Additionally, "in determining the numerator and denominator of the allocation factors of taxable members, transactions between or among members of the combined group shall be eliminated" (N.J. Stat. §54:10A-4.7(c)). A combined group election to include all affiliated members will require the group to allocate income by including the entire net income and loss, and allocation factors, of all members, regardless of any members' nexus with New Jersey (N.J. Stat. §54:10A-4.11(c)), i.e., a Finnigan methodology (Appeal of Finnigan Corp., No. 88-SBE-022 (Cal. St. Bd. of Equal. 8/25/88)).
Group elections: As mentioned above, the new provisions provide the ability to make elections to file unitary combined returns on either a worldwide or an affiliated group basis. An election on either basis will need to be made on a timely filed, original return and would be binding for, and applicable to, the period for which the election is made and the five succeeding periods. An election may be revoked prior to its expiration by written request to the New Jersey director of taxation, for reasonable cause including, but not limited to, a substantial change in ownership; members of the combined group or its principal business; or changes in tax law, regulation, or policy (N.J. Stat. §54:10A-4.11(b)). An election to have the combined group determined on a worldwide basis would require foreign members of the worldwide combined return to produce U.S. GAAP—adjusted, foreign currency—based profit-and-loss statements. Statements and allocation factors must be translated to U.S. dollars and further adjusted for book-tax differences as required by federal or state law (N.J. Stat. §54:10A-4.6(b)).
Regarding the affiliated group election, the term "affiliated group" has the same meaning as in IRC Sec. 1504, except that "common ownership" means that more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or noncorporate, whether or not the owner or owners are members of the combined group. Whether voting control is indirectly owned shall be determined in accordance with IRC Sec. 318 (N.J. Stat. §54:10A-4(aa)). Also, the affiliated group is determined without regard to whether the group includes: (1) corporations included in more than one federal consolidated return; (2) corporations engaged in one or more unitary businesses; or (3) corporations that are not engaged in a unitary business with any other member of the affiliated group (potentially including non-U.S. corporations) (N.J. Stat. §54:10A-4(x)).
Net operating losses: Similar to New York's shift to mandatory combined filing in 2015, New Jersey revised the CBT carryforward rules for net operating losses (NOLs). NOLs carried forward from the period immediately prior to the first combined filing year ("base year") are required to be converted from pre-apportioned to post-apportioned NOLs by applying the base year allocation factor (N.J. Stat. §54:10A-4(u)). The resulting carryforward for the "converted NOL" remains available for 20 years from the privilege period that the taxpayer incurred the loss (i.e., no restart in 2019) (N.J. Stat. §54:10A-4(u)(2)(B)).
The rule for merged survivor companies is also revised to allow for the carryover of NOLs resulting from mergers among combined group members included in a New Jersey combined return filing. A prior NOL is permitted, but only to offset the entire net income of the corporation that created it. Any loss brought into a combined group will be deductible only for the member that incurred the loss or members of the group from the year in which the loss was incurred (N.J. Stat. §§54:10A-4.6(g) and (h)). Additionally, the new provisions codify limits on the ability to carry forward an NOL when a 50%-or-more change in ownership of a corporation occurs due to redemption or sale of stock and the corporation changes the trade or business that generated the loss. Similar limitations apply where the "facts support the premise" that the corporation was acquired for the primary purpose of using its NOL carryforward. However, these limitations do not apply to members included in a New Jersey combined return (N.J. Stat. §54:10A-4(v)(5)).
For periods beginning after Dec. 31, 2016, and before Jan. 1, 2019, the dividends-received deduction (DRD) is reduced for a CBT taxpayer that owns 80% or more of a subsidiary — from 100% to 95%. Taxpayers are also required to allocate the portion of the dividend includible in entire net income by a "special allocation factor," applying the lesser of 3.5% or the average allocation factor for privilege periods 2014 through 2016. For privilege periods beginning on or after Jan. 1, 2019, the dividend exclusion rate for 80%-or-more-owned subsidiaries is 95%, with no application of the special allocation noted above (N.J. Stat. §54:10A-4(k)(5)(A)). For all periods, there is a 50% dividend exclusion rate for subsidiaries owned between 50% and 80% (N.J. Stat. §54:10A-4(k)(5)(B)).
The new statutory provisions impose a CBT surtax temporarily for privilege periods 2018 to 2021. The existing base CBT tax rate is 9% (N.J. Stat. §54:10A-5(c)(1)). For privilege periods beginning on or after Jan. 1, 2018, through Dec. 31, 2019, an incremental tax of 2.5% is added to the 9% base CBT tax rate for allocated net income over $1 million. For privilege periods ended on or after Jan. 1, 2020, through Dec. 31, 2021, an incremental tax of 1.5% is added to the 9% base CBT tax rate for allocated net income over $1 million (N.J. Stat. §54:10A-5.41(a)). Credits such as research and development credits are not permitted to offset the surtax, although installment payments, estimated payments, or overpayments from prior privilege periods may offset the surtax (N.J. Stat. §54:10A-5.41(b)).
For CBT purposes, the enacted 2018 changes resulted in the adoption of market-based sourcing for income related to services, effective for privilege periods beginning on or after Jan. 1, 2019. Sales of services are to be included in the numerator of the allocation formula if the benefit of the service is received in New Jersey. If the benefit is received both within and without the state, a reasonable approximation of the value can be applied to the service received within the state. Where the location of the benefit cannot be determined, under certain circumstances, sales are sourced to where the services were ordered or to the customer's billing address (N.J. Stat. §54:10A-6(B)(4)).
Other important aspects of New Jersey's recent changes are those that address the federal tax reform provisions in the TCJA, including those related to the following:
GILTI and FDII: The TCJA established new categories of income to be included in federal taxable income for tax years beginning on or after Jan. 1, 2018. These new categories include: (1) global intangible low-taxed income (GILTI), created under IRC Sec. 951A; and (2) foreign-derived intangible income (FDII), created under IRC Sec. 250(b). New Jersey's recent changes to the CBT did not alter the state's conformity to these new federal provisions. Accordingly, GILTI and FDII are both included in New Jersey CBT taxpayers' entire net income.
Furthermore, the TCJA introduced special deductions under IRC Sec. 250(a) for corporate taxpayers impacted by GILTI and FDII. These deductions are intended for federal purposes to reduce the effective tax rate for the GILTI and FDII amounts. New Jersey's recent changes did address these provisions. For privilege periods beginning on or after Jan. 1, 2018, CBT taxpayers are permitted a deduction toward the entire net income in the amount of the full value of the deduction the taxpayer was allowed under IRC Sec. 250(a). This new deduction is allowed only to the specific taxpayer that included the GILTI and FDII income on its federal and New Jersey CBT returns and that actually took the deductions for federal tax purposes. The conforming deduction related to IRC Sec. 250 applies only to corporate taxpayers (N.J. Stat. §54:10A-4.15).
On Dec. 24, 2018, the New Jersey Division of Taxation (DOT) issued revised guidance addressing the sourcing of GILTI and FDII for New Jersey CBT purposes. Included in that guidance, the DOT stated that GILTI and FDII are "sourced under the category of 'all other business receipts' pursuant to [N.J. Stat. Section] 54:10A-6(B)(6)." The guidance clarified that taxpayers may not look through to underlying sales to determine how to allocate GILTI and FDII, and instead required that "all corporation business taxpayers filing a CBT-100 or BFC-1 will calculate the portion of GILTI and FDII that is subject to New Jersey tax based on a separate special accounting method" (N.J. DOT, Technical Bulletin TB-85(R) (emphasis in original)).
TB-85(R) further provided the relevant allocation factor for computing tax on net GILTI and FDII amounts:
[The factor] will be equal to the ratio of New Jersey's gross domestic product (GDP) over the total GDP of every US state (and the District of Columbia) in which the taxpayer has economic nexus. GDP amounts should be based on the most recent quarter's data published by the US Bureau of Economic Analysis as of the end of the taxpayer's privilege period. ...
All CBT taxpayers reporting GILTI and FDII should complete the new Schedule A-6 in conjunction with their 2018 return, and include the allocated net GILTI and net FDII amounts on line 3c of page 1 of the CBT-100 or BFC-1 to remove those amounts from the regular tax calculation. [N.J. DOT, TB-85(R), p. 2 (emphasis in original)]
Finally, TB-85(R) stated that the DOT intended to promulgate regulations addressing the sourcing of GILTI and FDII and the IRC Sec. 250(a) deductions that would be consistent with the treatment set forth in the bulletin.
Responses to other TCJA provisions: New Jersey's legislation decouples from the new deduction for passthrough entities included in IRC Sec. 199A, by not permitting the associated deduction for privilege periods beginning after Dec. 31, 2017. This limitation applies for both CBT and gross income tax purposes (N.J. Stat. §54:10A-4(k)(2)(J)(ii)).
Effective after Dec. 31, 2017, New Jersey provides that the 30% limitation included in IRC Sec. 163(j) is to be applied on a pro rata basis and includes intercompany interest that would otherwise be required to be added back to New Jersey entire net income (N.J. Stat. §54:10A-4(k)(2)(K)). The DOT has issued guidance clarifying the "interest expense deduction limitation set forth under IRC §163(j), applies on a 'pro-rata' basis as between the total categories of related party and unrelated party interest" (N.J. DOT, Technical Bulletin TB-84(R), Dec. 10, 2018).
<div class="SmallText"><em>Editor: Jacob Puhl, J.D., LL.M.<br />
<p>The year 2018 saw unparalleled change in state tax. As the ramifications of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. <span class="">115</span>-<span class="">97</span>, began to be understood at the state level, the U.S. Supreme Court decision in <span style="font-style:italic; font-weight:normal;">South Dakota v. Wayfair Inc.</span>, 138 S. Ct. 2080 (2018), provided additional uncertainty. Added to this, some states, including New Jersey, enacted foundational changes to their specific state tax regimes. In 2018, the New Jersey Legislature enacted two bills (Assembly Bills A4202 and A4495) that fundamentally altered the state's taxing structure. This discussion summarizes some of the important changes impacting the New Jersey corporation business tax (CBT) and when these changes took effect or will become<span class=""> effective.</span></p>
<h5 class="Blue">The New Jersey combined group</h5>
<p>The most significant change to the CBT arising from the 2018 New Jersey legislation is the state's pending shift to mandatory unitary combined reporting. Effective for privilege periods ending on or after July 31, 2019 (A4202, &sect;33), New Jersey will require the determination of taxable income on a combined basis for unitary members of an affiliated group (N.J. Stat. <span lang="ar-SA">&sect;&sect;٥٤:</span><span class="">١٠A</span><span lang="ar-SA">-</span><span class="">٤</span><span lang="ar-SA">.٦ and ٤.٨(a)). A privilege period is the calendar or fiscal accounting period for which a tax is payable (N.J. Stat. &sect;٥٤:</span><span class="">١٠A</span><span lang="ar-SA">-</span><span class="">٤</span><span lang="ar-SA">(j)). </span></p>
<p><span style=",font-style:italic;;font-weight:bold;">Combined group definition: </span>Under the enacted provisions, "combined group" is defined as a group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax in New Jersey (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(z)). In turn, "common ownership" is defined to mean that "more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or <span class="">non</span>-<span class="">corporate</span>, whether or not the owner or owners are members of the combined group." The determination of whether voting control is indirectly owned is determined in accordance with Internal Revenue Code (IRC) Sec. 318 (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(aa)). Finally, "unitary business" is defined as "a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts." The new statute further provides that a "'[u]nitary business' shall be construed to the broadest extent permitted under the Constitution of the United States" (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(gg)).</p>
<p><span class=""><span style=",font-style:italic;;font-weight:bold;">Water's</span></span><span style=",font-style:italic;;font-weight:bold;">-</span><span class=""><span style=",font-style:italic;;font-weight:bold;">edge</span></span><span style=",font-style:italic;;font-weight:bold;"> default: </span>A "<span class="">water's</span>-<span class="">edge</span>" methodology will be the default method for determining composition of a New Jersey combined group. (As this item discusses later, worldwide and affiliated group elections are also available.) Under the <span class="">water's</span>-<span class="">edge</span> methodology, commonly owned unitary members incorporated in the United States are included in the group. Also included in the combined group will be: (1) commonly owned unitary members, wherever incorporated or formed, with at least 20% of property and payroll located in the United States, the District of Columbia, or any U.S. territory or possession during the privilege period; (2) any member that earns more than 20% of its income, directly or indirectly, from intangible property or related service activities that are deductible against the income of other members of the combined group; and (3) each member that has income and has "sufficient nexus" in New Jersey (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.11(a)). It is noteworthy that the combined group can include a captive insurance company, as defined in the statute (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(y)). The new provisions also provide an "80/20" rule, requiring exclusion from the New Jersey group of members with 80% or more of their payroll and property outside the United States, the District of Columbia, and any territory or possession of the United States during the privilege period (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.11(a)(1)).</p>
<p><span style=",font-style:italic;;font-weight:bold;">Calculation of combined income: </span>In computing the allocation factor for a combined group filing a <span class="">water's</span>-<span class="">edge</span> return, the "taxable member shall use the combined group's denominator," and the numerator shall only include "that taxable member's receipts assignable to this state" (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.7(a)), i.e., a <span style="font-style:italic; font-weight:normal;">Joyce</span> methodology (<span style="font-style:italic; font-weight:normal;">Appeal of Joyce, Inc.</span>, No. <span class="">66</span>-<span class="">SBE</span>-<span class="">070</span> (Cal. St. Bd. of Equal. 11/23/66)). Additionally, "in determining the numerator and denominator of the allocation factors of taxable members, transactions between or among members of the combined group shall be eliminated" (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.7(c)). A combined group election to include all affiliated members will require the group to allocate income by including the entire net income and loss, and allocation factors, of all members, regardless of any members' nexus with New Jersey (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.11(c)), i.e., a <span style="font-style:italic; font-weight:normal;">Finnigan</span> methodology (<span style="font-style:italic; font-weight:normal;">Appeal of Finnigan Corp.</span>, No. <span class="">88</span>-<span class="">SBE</span>-<span class="">022</span> (Cal. St. Bd. of Equal. 8/25/88)).</p>
<p><span style=",font-style:italic;;font-weight:bold;">Group elections: </span>As mentioned above, the new provisions provide the ability to make elections to file unitary combined returns on either a worldwide <span style="font-style:italic; font-weight:normal;">or</span> an affiliated group basis. An election on either basis will need to be made on a timely filed, original return and would be binding for, and applicable to, the period for which the election is made and the five succeeding periods. An election may be revoked prior to its expiration by written request to the New Jersey director of taxation, for reasonable cause including, but not limited to, a substantial change in ownership; members of the combined group or its principal business; or changes in tax law, regulation, or policy (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.11(b)). An election to have the combined group determined on a worldwide basis would require foreign members of the worldwide combined return to produce U.S. GAAP&mdash;adjusted, foreign currency&mdash;based <span class="">profit</span>-<span class="">and</span>-<span class="">loss</span> statements. Statements and allocation factors must be translated to U.S. dollars and further adjusted for <span class="">book</span>-<span class="">tax</span> differences as required by federal or state law (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>.6(b)).</p>
<p>Regarding the affiliated group election, the term "affiliated group" has the same meaning as in IRC Sec. 1504, except that "common ownership" means that more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or noncorporate, whether or not the owner or owners are members of the combined group. Whether voting control is indirectly owned shall be determined in accordance with IRC Sec. 318 (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(aa)). Also, the affiliated group is determined without regard to whether the group includes: (1) corporations included in more than one federal consolidated return; (2) corporations engaged in one or more unitary businesses; or (3) corporations that are not engaged in a unitary business with any other member of the affiliated group (potentially including <span class="">non</span>-<span class="">U</span>.S. corporations) (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(x)).</p>
<p><span style=",font-style:italic;;font-weight:bold;">Net operating losses: </span>Similar to New York's shift to mandatory combined filing in 2015, New Jersey revised the CBT carryforward rules for net operating losses (NOLs). NOLs carried forward from the period immediately prior to the first combined filing year ("base year") are required to be converted from <span class="">pre</span>-<span class="">apportioned</span> to <span class="">post</span>-<span class="">apportioned</span> NOLs by applying the base year allocation factor (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(u)). The resulting carryforward for the "converted NOL" remains available for 20 years from the privilege period that the taxpayer incurred the loss (i.e., no restart in 2019) (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(u)(2)(B)). </p>
<p>The rule for merged survivor companies is also revised to allow for the carryover of NOLs resulting from mergers among combined group members included in a New Jersey combined return filing. A prior NOL is permitted, but only to offset the entire net income of the corporation that created it. Any loss brought into a combined group will be deductible only for the member that incurred the loss or members of the group from the year in which the loss was incurred (N.J. Stat. &sect;&sect;54:<span class="">10A</span>-<span class="">4</span>.6(g) and (h)). Additionally, the new provisions codify limits on the ability to carry forward an NOL when a 50%-<span class="">or</span>-<span class="">more</span> change in ownership of a corporation occurs due to redemption or sale of stock and the corporation changes the trade or business that generated the loss. Similar limitations apply where the "facts support the premise" that the corporation was acquired for the primary purpose of using its NOL carryforward. However, these limitations do not apply to members included in a New Jersey comb<a id="_idTextAnchor002"></a>ined return (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(v)(5)).</p>
<h5 class="Blue">Dividends-received deduction </h5>
<p>For periods beginning after Dec. 31, 2016, and before Jan. 1, 2019, the <span class="">dividends</span>-<span class="">received</span> deduction (DRD) is reduced for a CBT taxpayer that owns 80% or more of a subsidiary &mdash; from 100% to 95%. Taxpayers are also required to allocate the portion of the dividend includible in entire net income by a "special allocation factor," applying the lesser of 3.5% or the average allocation factor for privilege periods 2014 through 2016. For privilege periods beginning on or after Jan. 1, 2019, the dividend exclusion rate for 80%-<span class="">or</span>-<span class="">more</span>-<span class="">owned</span> subsidiaries is 95%, with no application of the special allocation noted above (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(k)(5)(A)). For all periods, there is a 50% dividend exclusion rate for subsidiaries owned between 50% and 80% (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(k)(5)(B)).</p>
<h5 class="Blue">Surtax </h5>
<p>The new statutory provisions impose a CBT surtax temporarily for privilege periods 2018 to 2021. The existing base CBT tax rate is 9% (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">5</span>(c)(1)). For privilege periods beginning on or after Jan. 1, 2018, through Dec. 31, 2019, an incremental tax of 2.5% is added to the 9% base CBT tax rate for allocated net income over $1 million. For privilege periods ended on or after Jan. 1, 2020, through Dec. 31, 2021, an incremental tax of 1.5% is added to the 9% base CBT tax rate for allocated net income over $1 million (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">5</span>.41(a)). Credits such as research and development credits are not permitted to offset the surtax, although installment payments, estimated payments, or overpayments from prior privilege periods may offset the surtax (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">5</span>.41(b)).</p>
<h5 class="Blue">Market-based sourcing </h5>
<p>For CBT purposes, the enacted 2018 changes resulted in the adoption of <span class="">market</span>-<span class="">based</span> sourcing for income related to services, effective for privilege periods beginning on or after Jan. 1, 2019. Sales of services are to be included in the numerator of the allocation formula if the benefit of the service is received in New Jersey. If the benefit is received both within and without the state, a reasonable approximation of the value can be applied to the service received within the state. Where the<span class=""> location </span>of the benefit cannot be<span class=""> determined, </span>under certain circumstances, sales are sourced to where the services<span class=""> were </span>ordered or to the customer's<span class=""> billing </span>address (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">6</span>(B)(4)).</p>
<h5 class="Blue">Responses to federal tax reform</h5>
<p>Other important aspects of New Jersey's recent changes are those that address the federal tax reform provisions in the TCJA, including those related to the<span class=""> following:</span></p>
<p><span style=",font-style:italic;;font-weight:bold;">GILTI and FDII: </span>The TCJA established new categories of income to be included in federal taxable income for tax years beginning on or after Jan. 1, 2018. These new categories include: (1) global intangible <span class="">low</span>-<span class="">taxed</span> income (GILTI), created under IRC Sec. 951A; and (2) <span class="">foreign</span>-<span class="">derived</span> intangible income (FDII), created under IRC Sec. 250(b). New Jersey's recent changes to the CBT did not alter the state's conformity to these new federal provisions. Accordingly, GILTI and FDII are both included in New Jersey CBT taxpayers' entire net<span class=""> income. </span></p>
<p>Furthermore, the TCJA introduced special deductions under IRC Sec. 250(a) for corporate taxpayers impacted by GILTI and FDII. These deductions are intended for federal purposes to reduce the effective tax rate for the GILTI and FDII amounts. New Jersey's recent changes did address these provisions. For privilege periods beginning on or after Jan. 1, 2018, CBT taxpayers are permitted a deduction toward the entire net income in the amount of the full value of the deduction the taxpayer was allowed under IRC Sec. 250(a). This new deduction is allowed only to the specific taxpayer that included the GILTI and FDII income on its federal and New Jersey CBT returns and that actually took the deductions for federal tax purposes. The conforming deduction related to IRC Sec. 250 applies only to corporate<a id="_idTextAnchor003"></a> taxpayers (N.J. Stat. <span lang="ar-SA">&sect;٥٤:</span><span class="">١٠A</span><span lang="ar-SA">-</span><span class="">٤</span><span lang="ar-SA">.١٥).</span></p>
<p>On Dec. 24, 2018, the New Jersey Division of Taxation (DOT) issued revised guidance addressing the sourcing of GILTI and FDII for New Jersey CBT purposes. Included in that guidance, the DOT stated that GILTI and FDII are "sourced under the category of 'all other business receipts' pursuant to [N.J. Stat. Section] 54:<span class="">10A</span>-<span class="">6</span>(B)(6)." The guidance clarified that taxpayers may not look through to underlying sales to determine how to allocate GILTI and FDII, and instead required that "<span style="font-style:italic; font-weight:normal;">all corporation business</span> taxpayers filing a <span class="">CBT</span>-<span class="">100</span> or <span class="">BFC</span>-<span class="">1</span> will calculate the portion of GILTI and FDII that is subject to New Jersey tax based on a separate special account<a id="_idTextAnchor004"></a>ing method" (N.J. DOT, Technical Bulletin <span class="">TB</span>-<span class="">85</span>(R) (emphasis in original)). </p>
<p><span class="">TB</span>-<span class="">85</span>(R) further provided the relevant allocation factor for computing tax on net GILTI and FDII<span class=""> amounts: </span></p>
<p style="margin-left:15px;">[The factor] <span style="font-style:italic; font-weight:normal;">will be equal to the ratio of New Jersey's gross domestic product (GDP) over the total GDP of every US state (and the District of Columbia) in which the taxpayer has economic nexus.</span> GDP amounts should be based on the most recent quarter's data published by the US Bureau of Economic Analysis as of the end of the taxpayer's privilege period. ...</p>
<p style="margin-left:15px;">All CBT taxpayers reporting GILTI and FDII should complete the new Schedule <span class="">A</span>-<span class="">6</span> in conjunction with their 2018 return, and include the allocated net GILTI and net FDII amounts on line 3c of page 1 of the <span class="">CBT</span>-<span class="">100</span> or <span class="">BFC</span>-<span class="">1</span> to remove those amounts from the regular tax calculation. [N.J. DOT, <span class="">TB</span>-<span class="">85</span>(R), p.<span class=""> 2 </span>(emphasis in original)]</p>
<p>Finally, <span class="">TB</span>-<span class="">85</span>(R) stated that the DOT intended to promulgate regulations addressing the sourcing of GILTI and FDII and the IRC Sec. 250(a) deductions that would be consistent with the treatment set forth in the<span class=""> bulletin.</span></p>
<p><span style=",font-style:italic;;font-weight:bold;">Responses to other TCJA provisions: </span>New Jersey's legislation decouples from the new deduction for passthrough entities included in IRC Sec. 199A, by not permitting the associated deduction for privilege periods beginning after Dec. 31, 2017. This limitation applies for both CBT and gross income <a id="_idTextAnchor005"></a>tax purposes (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(k)(2)(J)(ii)). </p>
<p>Effective after Dec. 31, 2017, New Jersey provides that the 30% limitation included in IRC Sec. 163(j) is to be applied on a pro rata basis and includes intercompany interest that would otherwise be required to be added back to New Jersey entire net income (N.J. Stat. &sect;54:<span class="">10A</span>-<span class="">4</span>(k)(2)(K)). The DOT has issued guidance clarifying the "interest expense deduction limitation set forth under IRC &sect;163(j), applies on a '<span class="">pro</span>-<span class="">rata'</span> basis as between the total categories of related party and unrelated party interest" (N.J. DOT, Technical Bulletin <span class="">TB</span>-<span class="">84</span>(R), Dec. 10, 2018).</p>
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<p style="border-bottom: #000000 1px solid; padding-bottom: 0px; margin: 5px 0px; padding-left: 0px; padding-right: 0px; color: #000000; font-size: 16px; padding-top: 0px;"><span style="color: #1f497d; font-size: 16px;"><b>Editor</b></span>Notes</p>
<p><i>Jacob Puhl</i>, J.D., LL.M., is a former manager at Deloitte Tax LLP in Washington.</p>
<p>For additional information about these items, contact Alex Brosseau, CPA, MST at 202-661-4532 or <a href="mailto:abrosseau@deloitte.com">abrosseau@deloitte.com</a>.</p>
<p><i>Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.</i></p>