March 26, 2018 New Jersey provides guidance regarding deemed repatriation dividends On March 16, 2018, the New Jersey Division of Taxation (Division) issued further guidance (NJ 965 Guidance) on the state tax treatment of deemed repatriation dividends reported under Internal Revenue Code (IRC) Section 965 as amended by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Background The TCJA was signed into law on December 22, 2017, and completely revised IRC Section 965. IRC Section 965(a) requires a United States shareholder to include in its gross income all of the earnings and profits of its foreign subsidiaries accumulated abroad on its last return for a tax year beginning on or before December 31, 2017. IRC Section 965(c) allows such United States shareholders to claim a deduction against such includable income, providing an effective tax rate of 15.5% on the earnings and profits that constitute cash or cash equivalents; any remaining amounts are subject to a deduction that provides an effective tax rate of 8%. This transition tax is imposed regardless of whether the earnings and profits are brought back to the United States as an actual dividend or remain abroad.1 NJ 965 Guidance According to the NJ 965 Guidance, for New Jersey Corporation Business Tax (CBT) purposes, whether the deemed repatriation dividends are excludable from entire net income of a corporation that is a New Jersey taxpayer will be determined under N.J.S.A. 54:10A-4(k)(5). Under this provision, if the corporation owns 80% or more of a subsidiary, 100% of an amount treated as a dividend is excluded from entire net income. If the corporation owns between 50% and 80% of the foreign subsidiary, 50% of the deemed dividends are excluded. If the New Jersey taxpayer owns less than 50% of the stock of the foreign subsidiary, the entire amount of the deemed dividend is includable in entire net income. Further, the Division described the treatment of the IRC Section 965 transition tax under the New Jersey Gross Income Tax (GIT), which applies to individuals, estates and trusts (including the treatment of amounts in the distributive share of income of individuals from partnerships and S corporations). For GIT purposes, the NJ 965 Guidance stated that dividends are an enumerated category of income. Thus, deemed repatriation dividends reported under IRC Section 965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal income tax purposes. Implications The NJ 965 Guidance provides important guidance on the treatment of deemed repatriation dividends for those New Jersey taxpayers (both corporations and individuals) subject to either the CBT or GIT. The NJ 965 Guidance, however, does not address whether subchapter S corporation shareholders will be able to defer the inclusion of the deemed repatriation dividends until a recognition event occurs. The notice also does not address the treatment of deemed repatriation dividends for entities that are treated as Subchapter S corporations for federal income tax purposes, but as subchapter C corporations for CBT purposes. ———————————————
——————————————— 1 For more information on the state tax implications of the transition tax, see Tax Alert 2017-2171. | |||||||
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