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NJ Budget Impacts Individual and Business Tax, Calls for a Tax Amnesty

Jesse Cohen, J.D., LL.M. and Michael Gelbtuch 07.17.2018 | Client Alert

 

New Jersey’s Fiscal Year 2019 Budget was passed and signed into law by Governor Murphy on July 2, 2018 by way of several pieces of legislation (collectively referred to as the Bill). The Bill includes significant changes to both the Gross (Individual) Income Tax and Corporate Business Tax and calls upon the Division of Taxation to establish a 90-day tax amnesty program.

Here are details on the more significant changes.

GROSS INCOME TAX

The “Multi-millionaire’s Tax”

Beginning with the 2018 tax year, the Bill increases the top Gross Income Tax rate from 8.97% to 10.75%. The increased rate will be imposed on individual taxpayer’s earning $5 million or more.

CORPORATE BUSINESS TAX

Surtax on Corporations

The Bill established a new surtax on a taxpayer’s allocated net income beginning with the 2018 tax year. The surtax will be imposed at 2.5% on taxpayers with entire [allocated] net income over $1 million for the 2018 and 2019 tax years, and is reduced to 1.5% in 2020 and 2021 for taxpayers with allocated net income over $1 million.

It is worth noting that the current version of the legislation imposes the surtax on different tax bases for 2018-2019 and 2020-2021 (entire net income vs. allocated net income); however, the legislature is expected to clarify the correct tax base once the dust settles.

Net Operating Loss

Taking a page from New York’s corporate tax reform, the Bill adopts a post-apportioned net operating loss for tax years beginning on or after January 1, 2019. Taxpayers will be required to convert their pre-allocated losses from prior tax years to post-allocated amounts. Unlike New York’s reform, each converted New Jersey loss will retain its tax year with respect to the 20-year carryover provision.

Combined Reporting

For tax years beginning on or after January 1, 2019, any companies in a unitary business that meet an ownership threshold of greater than 50%, will be required to file a combined return.

Market-based Sourcing

The Bill adopts market-based sourcing for receipts from the sale of services for tax years beginning on or after January 1, 2019. Services will now be sourced to where the benefit of the service is received and required to be allocated based on a percentage of the total benefit if received at multiple locations. If the location of the benefit cannot be ascertained, the benefit will be deemed to be received at the customer’s billing address for individual customers, while the taxpayer must first look to where the service was ordered from before defaulting to the billing address for business customers.

Modifications to Dividends Received Deduction

Retroactive to periods beginning after December 31, 2016, dividends received from 80% or more owned subsidiaries are 95% deductible. Previously, the deduction was for 100%. As a result of the change, income repatriated under IRC Section 965 and deemed a dividend, will be subject to tax on 5% of the amount repatriated. For the 2017 tax year, the portion of this taxable deemed dividend attributable to New Jersey will be computed by applying the lesser of the taxpayer’s average allocation factor for the 2015 through 2017 tax years, or 3.5%.

Responses to the Federal Tax Cuts and Jobs Act

The Bill decouples from IRC Section 199A effectively disallowing the 20% special deduction for qualified business income from pass-through entities. The decoupling is effective for tax years beginning on or after January 1, 2018 and applies to both the Corporate Business Tax and Gross Income Tax Acts.

The Bill conforms to the IRC Section 163(j) 30% business interest expense deduction limitation effective for tax years beginning on or after January 1, 2018. The limitation applies on a pro-rata basis for interest paid to both related and unrelated parties, though the law provides no guidance as to what “pro-rata” means.

The Bill also modifies the existing exception to the related-party interest and intangible expense addbacks by imposing new requirements on payments to related members in a foreign nation with an income tax treaty with the United States. The related member must now be subject to tax in the foreign nation, include the related-party payment in the tax base, and the income received from the transaction must be taxed a rate within 3% of the tax applied to the interest deduction by the New Jersey taxpayer.

TAX AMNESTY

Under the Bill, the New Jersey Division of Taxation is required to establish a 90-day tax amnesty period that ends by January 15, 2019. The amnesty program applies to state tax liabilities for tax returns due from February 1, 2009 to September 1, 2017 and is available to eligible taxpayers who make full payment of any tax due plus one-half of any interest calculated through November 1, 2018.

The taxpayer will not be liable for the remaining one-half of the balance of interest nor any late payment, late filing or delinquency penalties, though a 5% amnesty penalty will be imposed, which is not subject to waiver or abatement. The Division of Taxation is expected to announce the specific dates for the 90-day period and release more detailed guidance on the program shortly.

GARDEN STATE FILM AND DIGITAL MEDIA JOBS ACT

Effective immediately, New Jersey is back in the movie business now that the previously expired tax credit program has been replaced by a new credit offering $75 million ($10 million for digital production companies) per year for five years. Digital production companies can get up to 20% and film production companies up to 30% of expenses incurred in New Jersey as a credit against tax.

SALES AND USE AND HOTEL TAXES

Sales Tax Nexus and Marketplace Facilitators

Taking a lead from the recent Supreme Court decision in Wayfair, which will be effective as of October 1, 2018, New Jersey has chosen to mirror the nexus standard established by South Dakota. This standard requires online sellers with either sales in excess of $100,000 or who have made 200 or more separate transactions in the State to collect New Jersey sales tax.

Marketplace facilitators (i.e., any person or business that provides retailers a forum to sell a product and collects receipts from the customer and remits them to the retailer) with New Jersey sales will also be required to collect and remit the tax.

The Airbnb Tax

Effective October 1, 2018, operators of short-term rentals (less than 90 days) booked through websites such as Airbnb and HomeAway will be required to collect sales and hotel occupancy taxes from their customers in the same manner as a hotel in New Jersey.

Meadowlands Hotel Use Assessment

The Bill expanded the Meadowlands Regional Hotel Use Assessment to include every district participating in the Meadowlands revenue sharing program. Hotel operators located in the following municipalities are now required to collect the 3% Meadowlands Regional Hotel Use Assessment on rent for occupancy of every hotel room:

  • Carlstadt,
  • East Rutherford,
  • Little Ferry,
  • Lyndhurst,
  • Moonachie,
  • North Arlington,
  • Ridgefield,
  • Rutherford,
  • South Hackensack,
  • Teterboro,
  • Jersey City,
  • Kearny,
  • North Bergen, and
  • Secaucus.

This legislation impacts businesses and individuals both within New Jersey and those outside who have any economic contact with the state. If you have questions, contact Jesse Cohen at 212.331.7576 | JeCohen@berdonllp.com or Michael Gelbtuch at 212.331.7567 | mgelbtuch@berdonllp.com or reach out to your Berdon advisor.

Berdon LLP New York Accountants

 

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