January 21, 2021
New Jersey releases multiple technical bulletins and a notice in response to November 4, 2020 changes in corporation business tax law
On January 13 and 14, 2021, the New Jersey Division of Taxation (NJ DOT) released several technical bulletins and a notice addressing various aspects of the enactment on November 4, 2020, of Senate Bill 3007 / Assembly Bill 4809 (S3007/A4809). S3007/A4809, which was intended as both a series of technical corrections to the state's Corporation Business Tax Act (CBT Act) and substantive compromises with New Jersey CBT payers, resulted in significant changes to various aspects of the CBT entire net income (ENI) base, tax attributes and filing methods (See Tax Alert 2020-2648).
These NJ DOT technical bulletin releases include the following:
In a notice issued on January 13, 2021 and entitled "The World-Wide and Affiliated Group Elections for 2019/2020 CBT-100U Returns," NJ DOT reiterates the administrative-combined-filing election relief for taxpayers impacted by S3007/A4809, as provided in TB-89(R) and as explained in this Alert.
The NJ DOT originally released TB-89 in May 2019 to provide guidance on the combined-filing component of 2018 CBT Act reform legislation. The NJ DOT's revisions to TB-89 in the newly revised bulletin address various combined-filing changes that were enacted by S3007/A4809, specifically the affiliated-group-election-ENI computation, associated election relief and means by which taxpayers can request revocation of a combined-filing election before its expiration.
According to TB-89(R), S3007/A4809 "clarified the definition of affiliated group [ … ] to specify that an affiliated group elective combined return would include the true U.S. footprint of a multinational business enterprise." Accordingly, "any entities incorporated or formed under the laws of a foreign nation that are required to file federal tax returns if such entities have effectively connected income [ECI] within the meaning of the federal Internal Revenue Code" are includable in an NJ CBT affiliated group return. The NJ DOT noted that, "in most cases, the New Jersey affiliated group combined return constitutes the multinational corporation's entire U.S. footprint," implying instances when the whole US footprint may not be includable.
For privilege periods ending on or after July 31, 2020, TB-89(R) requires a non-US corporation that files as a US domestic corporation (i.e., is included in the New Jersey affiliated-group election) to include ECI and "other U.S. source income" in the computation of ENI and in the computation of the allocation factor of the NJ CBT affiliated group. The corporation's other income (that is not ECI or other US-source income (i.e., income earned overseas)) and attributes are not included.
In response to the law change made by S3007/A4809, the NJ DOT will provide a one-time, prospective exception to the six-year combined-filing election commitment. Accordingly, any election the combined group makes on its 2020 NJ CBT-100U return will be considered the start of the six-year binding period, as opposed to the election selected on the group's 2019 CBT-100U.
This does not mean that taxpayers can retroactively change their 2019 filing method election, although this may not be significant since, according to the NJ DOT's interpretation of the statute as set forth in the bulletin, the November 4, 2020 statutory amendment to the affiliated group election only applies to tax years ending on or after July 31, 2020.
Further, the NJ DOT will not penalize taxpayers for filing their 2019 returns following the 2019 NJ CBT-100U instructions or the information provided in the technical bulletins. Taxpayers will not be penalized if they choose a different combined-group-filing-method option when they file their 2020 NJ CBT-100U return; they also will not be assessed for changes made to comply with the provisions of S3007/A4809 that differed from those described in the 2019 NJ CBT-100U return instructions and the technical bulletins.
In addition to the blanket, prospective, one-time, S3007/A4809-related election relief, the NJ DOT provided possible other grounds for discretionary relief. A taxpayer may receive relief, through a written request to the NJ DOT, for reasons including, but "not limited to, a substantial change in ownership [or] members of the combined group or principal business, or changes in tax law, regulation or policy."
Provisions of S3007/A4809 require taxpayers to attach copies or pertinent extracts of their federal income tax returns for privilege periods ending on or after July 31, 2020. Accordingly, the NJ DOT has specified that, in addition to the federal return(s) and attachments that were filed with the Internal Revenue Service (i.e., Forms 1120, 1120-F, 1120-S, etc., as applicable), a taxpayer must include all the following IRS forms and/or schedules if submitted with the taxpayer's federal return(s):
In this bulletin, the NJ DOT notes that failure to include a copy of the federal return as well as the previously noted forms will result in the taxpayer having submitted an incomplete NJ CBT return, which could result in penalties and interest for noncompliance. Further, the new law requires, and the bulletin explains, that taxpayers must make available to the NJ DOT upon request all other federal forms and schedules not listed previously.
Another provision of S3007/A4809 codified the NJ DOT's guidance in TB-91(R), Banking Corporations and Combined Returns (rev. March 12, 2020), establishing a mandatory mechanism for filing short-period banking corporation transition returns when the managerial member of a combined group to which the banking corporation belongs has a fiscal, as opposed to calendar, year-end. TB-99 provides associated guidance, including filing scenarios and filing instructions.
In TB-99, NJ DOT notes that, "beginning with the 2021 returns, banking corporations and financial business corporations will file a new standardized return, which is being developed by the [NJ DOT]" and that "Form BFC-1 will be phased out in future tax years." Further, "no penalties or interest will be assessed on any underpayment due to this statutory change if the applicable returns are filed timely by the taxpayer's original/automatic extension due date for the return or six months after November 4, 2020, whichever is later."
The NJ DOT's interpretation of certain aspects of S3007/A4809, particularly the computation of ENI for non-US affiliated group members, may result in significant changes to a taxpayer's estimated New Jersey CBT liability and may require a reassessment of any previously elected filing methods. It is unclear from the NJ DOT's guidance whether the computation of the ENI of a non-US affiliated group member is limited by federal tax treaties, or whether the reference to "other U.S. source income" is intended as a means of disregarding those treaties. Further, it is unclear what the implications are of the NJ DOT's interpretation of an affiliated group's ENI for purposes of taxpayers filing either on a water's-edge or worldwide basis, as the definition of ENI for non-US affiliates appears to be uniform for all filing methods in N.J.S.A. Section 54:10A-4.6(b).
Taxpayers should review their filings to determine whether they comply with the various changes provided in S3007/A4809 and with the NJ DOT's guidance in the bulletins and notice described in this Alert.