On July 1, 2018, New Jersey Governor Phil Murphy signed the 2019 Fiscal Budget, which includes in excess of $1.3 billion in tax hikes and the state’s responses to the Tax Cuts and Job Act (TCJA).
The highlights of the FY2019 budget include the following:
- Corporate tax surcharge averaging 2 percent over four years
- Market-based sourcing
- Responses to federal tax reform under the TCJA
- Tax amnesty program
- A ‘millionaire’s’ tax, increasing the individual tax rate for taxpayers with revenue in excess of $5 million to 10.75 percent
Surcharge for corporate taxpayers
Effective for tax years beginning on or after Jan. 1, 2018, corporate taxpayers with allocated net income (entire net income) allocating in excess of $1 million will be required to pay a temporary corporate surcharge over a four year period, averaging 2 percent. The surcharge will be in effect as follows:
- For tax years beginning on or after Jan. 1, 2018 through Dec. 31, 2019, the surtax imposed shall be 2.5 percent
- For tax years beginning on or after Jan. 1, 2020 through Dec. 31, 2021, the surtax imposed shall be 1.5 percent
Effective Jan. 1, 2019, New Jersey has enacted market-based sourcing for all taxpayers. Sales of services shall be sourced to the state if the benefit of the service is received at a location in the state.
Responses to the TCJA
The state has decoupled from the following provisions of TCJA:
965 transition tax
Under 965(a), for New Jersey Corporation Business Tax purposes, the deemed repatriation of dividends will be excluded from entire net income so long as the corporation meets the ownership thresholds. For New Jersey Gross Income Tax purposes, the deemed reparation of dividends must be included in the New Jersey gross income in the same tax year and in the same amount as reported for federal purposes.
Under 965(b), for tax years beginning on or after Jan. 1, 2017, taxpayers shall not be allowed the amount of any deduction, exemption, or credit allowed under the Internal Revenue Code for income reported pursuant to section 965 of the Internal Revenue Code.
Section 199A allows taxpayers, other than corporations, a deduction of 20 percent of qualified business income earned in a qualified trade or business, subject to certain limitations. For tax years beginning on or after Dec. 31, 2017, no deduction shall be allowed pursuant to section 199A of the Internal Revenue Code for New Jersey purposes.
Interest expense limitation
Under section163(j), as amended by the TCJA, the deduction for business interest is limited to the sum of the taxpayer's: (i) business interest income; (ii) 30 percent of adjusted taxable income; and (iii) floor plan financing interest. For tax years beginning on or after Dec. 31, 2017, the interest deduction limitation of section 163(j) shall apply on a pro-rata basis to interest paid to both related and unrelated parties, regardless of whether the related parties are subject to the add-back provisions.
Tax Amnesty Program
As part of the 2019 budget, the New Jersey Division of Taxation will enter into a Tax Amnesty Program for a 90-day period, ending no later than Jan. 15, 2019. Taxpayers taking advantage of the program will be entitled to a waiver of 50 percent of the interest owed and complete waiver of late payment penalties, late filing penalties, cost of collections, delinquency penalty and recovery fees.
For taxable years beginning on or after Jan. 1, 2018, taxpayers with taxable income in excess of $5 million will be subject to a 10.75 percent tax rate, an increase from 8.970 percent.
Further, from an employer perspective, for purposes of calculating withholding tax for the taxable year 2018, withholding by every employee from salaries, wages and remuneration paid by an employer for services rendered in excess of $5 million shall be at a rate of 15.6 percent, no later than Sept. 1, 2018.
A combined return will be required for all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax. The designated member of the combined group can elect to report income on a worldwide basis or an affiliated group basis, with the default being water’s-edge.
Similar to how other states have treated the transition from a separate return to a combined return, New Jersey will have a deduction, over a 10-year period, for the change in deferred tax assets and deferred tax liabilities, for publically traded companies.
Net operating loss conversion
New Jersey will join other states with a post-apportioned net operating loss. Assembly Bill 4202 includes the mechanisms for converting the prior apportioned net operating loss to a post apportioned net operating loss using a base period, however the base period year has yet to be determined.
Elimination of carried interest
Assembly Bill 3088 provides for the elimination of the carried interest loophole. Accordingly, the bill provides an exclusion from New Jersey source income for carried interest from providing investment management services. The bill also includes a 17 percent surtax on management income and amends the sourcing rules for investment management services. The carried interest provisions do not go into effect until Connecticut, Massachusetts and New York enact similar legislation.
Due to the above provisions being enacted six months into the calendar year and affecting the 2018 tax year, both, the division and taxpayers have limited time to address the impact of these provisions. Accordingly, impacted taxpayers should review the new law and contact their tax advisers as soon as possible.