On October 4, 2018, New Jersey Governor Phil Murphy signed Senate Bill 2989 (S2989) / Assembly Bill 4495 (A4495) (the Bill), which makes technical corrections and substantive changes to recently enacted Assembly Bill 4202 (A4202) (signed into law on July 1, 2018). A4202 itself made historic, substantial changes to the New Jersey Corporation Business Tax (CBT) law. (See Tax Alert 2018-1342 discussing the many changes to the CBT brought about through enactment of A4202.)

The technical corrections and substantive changes in the Bill are summarized below:

Technical corrections (to understand the full impact of these technical changes, kindly read this Alert in conjunction with our earlier Alert, Tax Alert 2018-1342, dated July 2, 2018)

The Bill includes the following technical corrections and clarifications:

• The addback rules related to intercompany intangible and interest payments do not apply to the extent that the group members are included in the same New Jersey combined return.
• For purposes of calculating a taxpayer's New Jersey allocation (i.e., apportionment to New Jersey), as applied to the portion of actually paid and deemed paid dividends, including repatriated income under IRC Section 965 (commonly referred to as the Transition Tax) included in the taxpayer's entire net income (ENI), the average three-year formula is amended to use an average of the recipient taxpayer's New Jersey allocation from the 2014 through 2016 tax years, instead of the 2015 through 2017 tax years as originally set forth in A4202.
• Taxpayers reporting actually paid and deemed paid dividends for 2017 and 2018 can apply the lesser of: (1) the three-year New Jersey average allocation factor just described; or (2) 3.5%. A4202 only allowed this provision for Transition Tax reported on a 2017 return.
• Pre-allocated net operating losses incurred before privilege periods ending July 31, 2019 (PNOLs) are converted to post-allocated net operating losses by applying the taxpayer's business allocation factor from the last privilege period preceding the privilege period ending on or before July 31, 2019 to the accumulated PNOLs.
• The deferred tax asset (DTA) deduction available to public companies due to the diminution of DTAs or increase in deferred tax liabilities (DTLs) due to the transition from separate return to combined reporting is clarified to apply to either taxpayers filing on a water's-edge basis or electing to file on a worldwide basis or as an affiliated group.
• An existing provision limiting the carryforward of PNOLs after a change of corporate ownership applies to net operating losses incurred in privilege periods ending on or after July 31, 2019 (NOLs), except when the change of corporate ownership occurs among members of a New Jersey combined reporting group.
• Combinable captive insurance companies are not exempt from the CBT but non-combinable captive insurance companies will be exempt.
• The combined filing rules apply to privilege periods ending on or after July 31, 2019.
• The combined net operating loss (NOL) carryforward rules apply to privilege periods ending on or after July 31, 2019.
• The 2.5% (applicable in tax years 2018 and 2019) and 1.5% (applicable in tax years 2020 and 2021) CBT surtaxes are clarified to apply to allocated ENI of taxpayers with allocated ENI over $1 million. It remains unclear if the $1 million threshold will, in combined reporting returns, apply separately for each member company or to the entire allocated taxable income of the combined group.

Substantive changes

In addition to the technical clarifications and corrections previously described, the Bill includes the following substantive changes to the CBT:

• Deductions under IRC Section 250 (e.g., the GILTI¹ and FDII deductions) are allowed to the extent that IRC Section 951A GILTI income is included in ENI.
• The change in NOL and dividend received deduction (DRD) ordering rules included in A4202 are reversed, in order to restore the long-standing requirement that NOLs must be used to reduce ENI before applying the DRD. Moreover, the Bill clarifies that any DRD amount resulting in an ENI amount below $0 may not be carried forward to future tax years.
• The definition of "combined group" is expanded to include "all business entities" instead of just applying to "corporations."
• The CBT minimum tax of $2,000 applies on an individual basis to each member of a combined reporting group, including companies with CBT nexus and companies without CBT nexus.
• The effective dates of A4202 provisions were amended as follows:
• Provisions related to the changes in the DRD apply to tax years beginning on or after January 1, 2017.
• Provisions related to combined filing and market-based sourcing apply to tax years ending on or after July 31, 2019.
• All other provisions of the Bill apply to tax years beginning on or after January 1, 2018.
• The taxability of the sale or assignment of tax credit transfer certificates for gross income tax purposes is amended to apply only to such tax credits awarded after July 1, 2018, regardless of when such credits are sold or assigned.

Implications

The Bill adds an additional layer of complexity to the already complex changes brought about in A4202 on July 1, 2018. These amendments, which are intended as additional revenue raisers, will likely impact all taxpayers that are required to file New Jersey CBT returns.

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ENDNOTES

¹ Global Intangible Low-Taxed Income.