The New Jersey Division of Taxation has released a package of proposed guidance related to the CBT that would amend, repeal and implement new regulations in response to recent statutory changes. Specifically, the guidance package addressed CBT changes made by P.L. 2022, c. 133 (signed December 22, 2022); P.L. 2023, c. 50 (signed May 8, 2023); and P.L. 2023, c. 96 (signed July 3, 2023). (For more on c.96, see Tax Alert 2023-1182.) The full text of the proposed amendments can be found here.

The proposed changes aim to clarify existing rules, eliminate obsolete regulations and correct typographical and grammatical errors. They also would prospectively incorporate parts of the Multistate Tax Commission's (MTC) updated guidelines on P.L. 86-272.¹ Several outdated provisions would be repealed, and technical corrections would be made to ensure clarity and compliance with current laws.

Key changes in the proposed rules include:

• Net operating losses (NOLs): Proposed amendments would clarify the treatment of NOLs and their carryovers, aligning the state's provisions with IRC Section 172. Proposed new rules would establish a pooling system for combined group members and would require tracing of the NOLs to be maintained by the combined group and members. These changes would apply to privilege periods ending on and after July 31, 2023. [N.J.A.C. 18:7-5.21; N.J.A.C. 18:7-21.11 and .27]
• S Corporations: Proposed amendments would codify changes made by P.L. 2022, c. 133, that simplified the administrative process for S corporations and qualified Subchapter S Subsidiaries by making their election status automatic upon IRS approval and allowing an opt-out for those wishing to be taxed as C corporations. This change would apply to privilege periods beginning on and after December 22, 2022. [N.J.A.C. 18:7-3.6]
• Nexus rules: Proposed amendments would add a new subsection to incorporate the new bright-line nexus rule, which established thresholds for business activities in New Jersey, requiring businesses with over $100,000 in receipts or 200 transactions to file CBT returns. Proposed amendments also would clarify whether activities of unitary partnerships are considered when determining nexus at the corporate owner level. This change would apply to privilege periods ending on and after July 31, 2023. [N.J.A.C. 18:7-1.6]
• Combined reporting: Proposed amendments would modify and add new definitions related to combined returns in accordance with changes made to the state's combined reporting regime by P.L. 2023, c. 96, including a revised definition of "unitary business" as of July 31, 2023, and new definitions of "world-wide basis" and "world-wide group" as of July 31, 2022. Proposed amendments would also clarify the treatment of, and add definitions for, various entities, such as captive investment companies, captive real estate investment trusts, and captive regulated investment companies. These changes apply to privilege periods ending on and after July 31, 2023, unless otherwise noted. [N.J.A.C. 18:7-21.1]
• Tax credits and deductions: Proposed amendments would repeal prior rules that set forth the ordering of tax credits and replace them with a simplified method for the use of tax credits, in general, that the taxpayer earned, purchased, or was awarded. Generally, unless the statute specifies that the credit be used first, a taxpayer would be able to use their tax credit and credit carryover within the period specified by the statue. The proposed amendments would also clarify the treatment of various deductions, including allowing (1) qualified research expenditures to match the expenditures for the New Jersey research and development tax credit regardless of the timing schedule under IRC Section 174, and (2) research expenditures of cannabis licensees. The change regarding the research credit would apply to privilege periods beginning on or after January 1, 2022. [N.J.A.C. 18:7-3.17; N.J.A.C. 18:7-3.23A]
• Digital assets and financial services: Proposed new rules would clarify that financial products, instruments and services are not considered tangible personal property and, therefore, not protected by P.L. 86-272. This distinction would impact how digital assets are taxed and reported, ensuring that transactions involving digital assets, such as virtual currencies or non-fungible tokens and related services, are subject to the same regulations as other financial products. The proposal includes several examples. These changes aim to provide clearer guidelines for businesses operating in the digital space, enhancing compliance and aligning New Jersey's tax framework with evolving financial technologies. [N.J.A.C. 18:7-1.8]
• Amendments to filing procedures: Proposed amendments to filing requirements include electronic submission mandates for most amended returns and clarifications on the due dates for CBT returns. Paper returns would be acceptable under certain circumstances, such as when the taxpayer's software doesn't allow them to file the electronic return or for certain amended returns. [N.J.A.C. 18:7-11.13]
• Partnerships: Proposed amendments would codify a statutory change that exempts partnerships from the nonresident withholding tax for nonresident corporation partners that are part of a combined group, provided the partnership is unitary with that group. [N.J.A.C. 18:7-7.6]
• Internet activities: Proposed new regulation would provide clarity on whether internet activities exceed P.L. 86-272 protections. While the proposal relies on the MTC's P.L. 86-272 guidelines, it would expand on other activities not covered under the MTC's guidelines. The list of protected and unprotected activities is substantially similar to the activities listed in the New Jersey Division of Taxation CBT nexus guidance (TB-108(R)) revised on January 18, 2024 (see Tax Alert 2023-1527.).² [N.J.A.C. 18:7-1.9A]

Among other things, the proposed amendments would:

• Clarify the treatment of IRC Section 959 dividends [N.J.A.C. 18:7-5.20]
• Clarify how to source capital gains when they are integrated or not integrated in business and operational income [N.J.A.C. 18:7-8.9]
• Clarify that capital gains from the sale of bonds, digital assets, or other financial products/instruments sold for trading purposes are not treated as capital gains and includable in the receipts fraction [N.J.A.C. 18:7-8.9]
• Amend provisions regarding the extended due date of the CBT return, still maintaining the 15th day of the month following the month of the extended Federal due date. [N.J.A.C. 18:7-11.12]
• Clarify that combined group members are jointly and severally liable [N.J.A.C. 18:7-13.11]
• Clarify that a place of business in New Jersey also includes employees who routinely work from home [N.J.A.C. 18:7-17.8]

Implications

Overall, these proposed changes aim to modernize the tax code, reduce administrative burdens and enhance clarity for taxpayers and tax administrators alike. The proposed amendments are wide-ranging, and it is likely that the New Jersey CBT filings of many taxpayers will be impacted to some degree. Interested parties should review the proposed amendments and consider submitting comments. The deadline for submitting written comments is April 19, 2025. This will be the only opportunity for interested parties to submit comments before the Division of Taxation finalizes the regulations.

Written comments can be submitted via e-mail (Tax.RuleMakingComments@treas.nj.gov) or by mail to the following address:

Mary Richmond-Michael
Administrative Practice Officer
Division of Taxation
3 John Fitch Way - 8th Floor
PO Box 240
Trenton, NJ 08695—0240