New Jersey Gov. Phil Murphy signed legislation into effect on July 3, 2023 adopting several changes to the CBT, including but not limited to the changes below.
Nexus Standards Expanded
New Jersey has expanded the nexus qualifications for CBT purposes to adopt the Wayfair nexus standard. A corporation will be deemed to have substantial nexus for CBT purposes if it:
- Derives receipts from sources in New Jersey in excess of $100,000 during the corporation’s tax year; or
- Has 200 or more separate transactions delivered to customers during the corporation’s tax year.
Taxation of Captive Investment Companies, RICs, & REITs
For tax years ending on or after July 31, 2023, captive investment companies, captive regulated investment companies (RICs), and captive real estate investment trusts (REITs) are taxed in the same manner as regular C corporations and are not entitled to special tax treatment. These companies are not permitted to claim any deductions or expenses that were permitted for federal purposes as a result of being an investment company or RIC and must be included in a New Jersey combined filing.
Worldwide Definitions Clarified
For tax years ending on or after July 31, 2022, New Jersey clarified the terms worldwide basis and worldwide group to include all members of the combined group regardless of location or formation. All income and attributes of those members are included in the combined group, regardless of how/whether the members file or report their income for federal purposes.
Water’s Edge & Affiliated Group Treatment Updated
For tax years ending on or after July 31, 2022, New Jersey updated the treatment of foreign affiliates included under a water’s edge or an affiliated group filing to include such entities only to the extent of effectively connected income (ECI) or loss. The foreign member of the affiliate group will take into account only the items of expense and allocation factor receipts attributable to the ECI.
Managerial Member Election Duration
Once the managerial member is designated, the election is binding for the current tax year and the following five years. Previously, the designation was binding for 10 tax years.
GILTI & FDII
For tax years ending on or after July 31, 2023, amounts included in federal taxable income under IRC §951A, i.e., GILTI, are considered to be dividends and subject to the state’s dividends received deduction. The deduction for amounts deducted under IRC §250 related to FDII and GILTI is repealed.
Interest & Intangible Addbacks
For tax years ending on or after July 31, 2023, the interest and intangible addbacks for amounts paid to related members are repealed.
Interest Expense Limitations
For tax years ending on or after July 31, 2022, the interest expense deduction limitation imposed by IRC §163(j) applies as though the combined group filed a federal consolidated return. This means that taxpayers with a New Jersey-affiliated group that has members who are not part of a federal consolidated group will need to compute their §163(j) limitation on a New Jersey-affiliated group basis.
Finnigan Rule Adoption
For tax years ending on or after July 31, 2023, the Finnigan rule is in effect for computing the allocation factor of the combined group. Under the Finnigan rule, all unitary receipts of all members of the combined group are taken into account, as though they are one taxpayer.
Prior NOL Conversion Carryover Rules
For tax years ending on and after July 31, 2023, any remaining balance of prior net operating loss (NOL) conversion carryover deductions of the members of a combined group are pooled together and allowed to offset the entire net income allocated to New Jersey of either:
- The combined group for which the corporation is a member; or
- The corporation that created the prior NOL conversion carryover, provided that the corporation departs the combined group before the corporation’s respective prior NOL conversion carryover has been completely used.
For tax years ending on and after July 31, 2023, before subtracting the prior NOL conversion carryforwards and subtracting the NOLs of the combined group when computing the total taxable net income, the combined group must (in order of sequence):
- Add together the allocated entire net income from the unitary business of the combined group and the portion of allocated entire net income of members with activities independent of the group;
- Subtract the prior NOL conversion carryforwards; and
- Subtract the NOLs.
NOL Deduction Limitation
For tax years ending on or after July 31, 2023, the NOL deduction is subject to the federal limitation, which states that the NOL deduction cannot exceed 80% of taxable income computed without regard to the NOL deduction.
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