New Jersey’s fiscal year 2019 budget bill includes a new “millionaire’s tax” for individuals as well as dramatic corporate business tax reform. Below are the highlights.
Gross Income Tax
- For tax years beginning on or after January 1, 2018, a new 10.75% gross income tax rate is imposed on individuals with taxable income in excess of $5 million. This is being referred to as the “millionaire’s tax.” The previous top marginal gross income tax rate was 8.97%.
- Effective for 2018, the maximum property tax deduction has been increased from $10,000 to $15,000.
- New Jersey also recently amended the Gross Income Tax Act by adding a 17% surtax on carried interest earned in the state. However, in an attempt to prevent asset managers from relocating their funds to other states, the new tax will remain in abeyance until identical legislation passes in Connecticut, Massachusetts and New York.
Corporation Business Tax
- Effective January 1, 2019, New Jersey will require combined reporting for a unitary business under common control. “Unitary business” means a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide synergy and mutual benefits that produce a sharing or exchange of value among them, and a significant flow of value among the separate parts. New Jersey states that the definition of a unitary business should be interpreted “to the broadest extent permitted under the U.S. Constitution.” A taxpayer can elect worldwide combined reporting; the default is water’s edge filing.
- For tax years beginning in 2018 and 2019, New Jersey enacted a 2.5% surtax for taxpayers with apportioned net income greater than $1 million. The surtax is reduced to 1.5% for tax years beginning in 2020 and 2021.
- Effective for tax years after December 31, 2016, New Jersey will allow a 95% deduction for dividends included in the calculation of federal taxable income, but only if the taxpayer has an 80% or more ownership in the subsidiary. The deduction is lowered to 50% if the taxpayer only has a 50% or more ownership interest in the subsidiary.
- Disallows any deduction, exemption, or credit allowed for federal income tax purposes under IRC Section 965 for tax years beginning on or after January 1, 2017
- Disallows the IRC Section 199A deduction for qualified business income from pass-through entities for both the Corporation Business Tax and the Gross Income Tax.
- Applies the interest deduction limitation of IRC Section 163(j) on a pro-rata basis for interest paid to both related and unrelated parties, both for tax years beginning after December 31, 2017.
- New Jersey modified its interest addback exception. The taxpayer is not required to add back interest if the following criteria are met:
- The taxpayer can demonstrate that the interest was paid to a related member in a foreign country;
- The related member was subject to tax in that country on a tax base that included the interest payment; and
- The effective rate of the tax was equal to or greater than New Jersey’s rate, minus three percentage points.
- Effective January 1, 2019, New Jersey will use market-based sourcing for services. In other words, services will be sourced to New Jersey if the benefit of the service is received by the customer in the state.
- The old pre-apportioned NOL provisions are eliminated and instead a new ‘prior net operating loss’ (PNOL) conversion carryover has been enacted, to be computed for the final separate return year (the 2018 tax year) and applied on a post-apportioned basis against entire net income.
As some of the provisions of the bill have already taken effect, New Jersey will not assess penalties or interest for the underpayment of tax related to those items. In view of these significant changes, this is a good time to review with your Mazars USA tax team your corporation’s potential New Jersey tax liabilities and to ensure you have plans in place to institute the new market-based sourcing rules.
Please contact your Mazars USA LLP professional for additional information.