On February 18, the New Jersey Division of Taxation published proposed corporation business tax (CBT) regulations that incorporate changes associated with 2023 reform legislation, as well as additional changes intended to clarify the effects of prior legislation. These regulations will impact all CBT payers, both within and outside the state. Any taxpayers that may be impacted by specific provisions should consider submitting comments within the 60-day comment period.
The proposed regulations (with key items summarized below) impact all aspects of the CBT, including taxability, filing methodologies, the tax base, income apportionment, tax attributes, and various procedural matters. They include both clarifying and substantive elements and provide guidance on new and developing technologies and products.
Summary of Key Items
Taxability
- Bright-line nexus standard for out-of-state businesses ($100,000 in annual in-state receipts or 200 in-state transactions)
- Activities falling outside Public Law 86-272 protection (e.g., solicitation of sales of financial products [including digital assets], instruments, services, warranties, and various Internet activities)
- Captive real estate investment trusts, captive investment companies, and captive regulated investment companies taxed as regular C corporations
- Impact of the nexus rules with regard to unitary and non-unitary partnerships
Filing Methodology
- Treatment of a combined group as a single taxpayer
- Captive real estate investment trusts, captive investment companies, and captive regulated investment companies includable as members of a combined group
- Water’s-edge inclusion category change (formerly nexus, now effectively connected income or loss)
Tax Base
- IRC Section 174 decoupling for New Jersey-qualified research expenses
- Clarity on application of tax treaties in combined returns
- International banking facility deduction calculation rules
- IRC Section 959 previously taxed income modified decoupling rules
- Conditions clarifying when a tax paid to a foreign country or US possession is deductible from entire net income
- Statutory deductions for cannabis licensees
- Gain deferral for transactions among combined group members
- Changes to the treatment of IRC Section 951A dividend exclusion eligibility
- IRC Section 250(a) and foreign-derived intangible income deduction repeal
Apportionment
- Exclusion of nontaxable income from the receipt factor
- Capital gain sourcing (if operational or nonoperational income)
- Capital gains earned from the sale of bonds, digital assets, or other financial products/instruments that are sold for trading purposes not treated as capital gains and includable in the receipts fraction in the same manner as other receipts in accordance with the taxpayer’s federal accounting method
- Additional reasonable approximation methods and examples for sourcing service and other receipts (e.g., GDP data, such as data from the International Monetary Fund, US Census Bureau, US Central Intelligence Agency World Factbook, Organisation for Economic Co-operation and Development, World Bank, US Bureau of Economic Analysis, World Economic Forum, and Federal Reserve)
- Receipt sourcing details using tonnage miles for the shipping and logistics industry
- Detailed sourcing rules for the gaming industry, including casinos and online gambling businesses
- Application of Finnigan apportionment to all combined filing methods
Attributes
- Simplified credit utilization (a taxpayer may use their tax credits and unexpired tax credit carryovers when applying their tax credits within the limits of the credit, except in instances where the credit statute provides that it is to be applied first)
- Taxpayer ability to make adjustments to net operating losses during the course of an audit
- Application of IRC Section 172(a)(2) limitation rules to net operating losses, streamlined combined-loss calculations for combined groups
- IRC Section 163(j) disallowed-interest carryforward rules
- Net operating loss carryforward, dividend exclusion, and international banking facility ordering rule changes
- Net operating loss carryforward statutory merger survival rules
- Creation of pools of prior net operating loss conversion carryovers and net operating loss carryforwards
- Extended duration of net deferred tax liability deduction to 27 years
Payments and Procedural Matters
- Automatic federal S corporation and qualified subchapter S subsidiary status conformity
- Procedures to elect New Jersey C corporation treatment for S corporations and qualified subchapter S subsidiaries
- Estimated nonpayment safe harbor increase to $1,500 (applied to each taxable member of a combined filing group)
- Exemption from partnership nonresident withholding tax for corporation partners that are members of a combined group when the partnership is unitary with the combined group
- Required inclusion of federal forms and multiyear credit schedules for carryforward tracking purposes
- Due date clarification (15th day of the month subsequent to the month of the due date of the filed federal return)
- Allowance for paper-filed amended return under certain circumstances (e.g., taxpayer’s software does not permit electronic filing)
- Requirement for non-US combined-group members to attach filed federal return, or if no return, a pro forma filing, and, if filed, federal Form 8833
- Requirement for taxpayers to include federal Form 7205, if filed
- Joint and several liability of combined group members
- Tax clearance not required for intercompany mergers between combined group members in a continuing combined group
- Tax clearance not required for statutory conversions and domestications of an entity that continues to be registered with New Jersey or maintains a valid updated certificate of authority
- Place of business in New Jersey defined to include a location where an employee routinely works from home
- Proration and allocation of professional fees allowed
- Managerial member period reduced from 10 privilege periods to six
Tax law changes of such a significant nature generally impact some taxpayers more or less favorably than others, with certain uniquely situated taxpayers subject to significant, unintended negative effects. Such taxpayers should avail themselves of the Division of Taxation’s mechanism for correcting distortions to income or apportionment.
For any questions regarding the proposed regulations, contact Michael A. Puzyk, Michael A. Guariglia, or Paul V. Buonaguro.