New Jersey Assembly Bill 5232 enacted on July 3, 2023 contains significant tax changes to Corporation Business Tax (CBT) and Gross Income Tax (GIT). New Jersey Division of Taxation has issued TB-107 to provide guidance on the amendments. Here are some of the major changes:
For privilege periods ending on and after July 31, 2022:
- Research and Development – Taxpayers will now be able to deduct the research and development expenses in the same year as the R&D Tax Credit.
- Section IRC § 163(j) Limitation – Changes to conformity of applying the interest deduction limitation on a consolidated basis have been put into effect. Taxpayers that file a separate New Jersey Corporation Business Tax returns or combined return but file a single federal consolidated return are generally treated as one taxpayer.
- Income of Non-U.S. Corporations that are not Members of a World-Wide Group Combined Return — Non-U.S. corporations that are not members of a world-wide group combined return must include effectively connected income (reported for federal purposes and not protected by a tax treaty) in their returns. However, they do not need to add back world-wide income that was not included for federal purposes. The allocation factor will only consider receipts and expenses related to such income (loss) amounts.
For tax years beginning on and after January 1, 2023:
- Gross Income Tax (business receipts) and Corporation Business Tax Sourcing Uniformity – Businesses subject to Gross Income Tax (regardless of form) that engages in trade or business within and without New Jersey must now follow the Corporation Business Tax (CBT) rule when the portion of the New Jersey income cannot readily or accurately be determined. The CBT rule uses a single sales factor for business receipts and market sourcing rules for service receipts.
For privilege periods ending on and after July 31, 2023:
- Finnigan Method – The apportionment method has been changed from Joyce to Finnigan. Under the Finnigan method, New Jersey receipts for all combined group members are included in the numerator of the allocation factor, regardless of nexus determination. This replaces the Joyce method, which only included New Jersey receipts for members with New Jersey nexus.
- Treatment of GILTI and the I.R.C. §250 Deduction – The deductions for GILTI and FDII IRC Section 250 have been repealed, and GILTI income is now treated as a dividend prospectively.
- Net Operating Loss Sharing Rules for Combined Groups – Combined group members are now allowed to use the remaining unused unexpired balance of prior net operating loss (PNOL) generated by other members prior to joining the combined group. Previously, only the members who generated the NOLs were allowed to utilize them.
Article by Aisan Wu, Tax Manager