The New Jersey (NJ) Division of Taxation has issued several technical bulletins to discuss updates to the NJ corporation business tax rules related to the dividend exclusion, net operating losses (NOLs), and gross income tax sourcing rules. In this article, we provide additional details regarding each of these topics.
Prior to July 31, 2023, the dividend exclusion was calculated post-allocation. In addition, a 95% dividend exclusion was allowed for taxpayers with 80% or more ownership of the payor/deemed payor. For tax years ending on and after July 31, 2023, the dividend exclusion is calculated pre-allocation. The dividend exclusion is applied after NJ additions, but before NJ deductions and allocation of the entire net income.
In NJ, a 100% exclusion of dividends and deemed dividends is allowed if paid or deemed paid by an 80% or more owned affiliate. A 50% exclusion of dividends and deemed dividends is allowed if paid by taxpayers with 50% to 80% ownership. There is no mention of exclusion for dividends paid by taxpayers with less than 50% ownership.
For tax years ending on and after July 31, 2023, GILTI (global intangible low-taxed income) under Internal Revenue Code Section 951A is treated as a dividend for NJ reporting purposes, and thus can be included in the dividend exclusion, if applicable.
The dividend exclusion must be reduced by 5% of all dividends to account for expenses and deductions attributable to the dividends received during the privilege period. However, this reduction does not apply to intercompany dividends between members of the same NJ combined group.
NOL Ordering Rules
Prior to July 31, 2023, NJ prior net operating loss conversion carryover deductions (PNOLs) and NOLs were calculated pre-allocation. For tax years ending on and after July 31, 2023, PNOLs and NOLs are calculated post-allocation. Taxpayers cannot adjust PNOLs or NOLs from tax years ending before July 31, 2023.
PNOLs and NOLs are subtracted after deducting the current-year exclusions and deductions if the allocated entire net income is greater than zero. As a reminder, under NJ Statutes Annotated 54:10A-4.6, any remaining unused and unexpired PNOLs and NOLs of combined group members are pooled into PNOL and NOL pools for the combined group for tax years ending on and after July 31, 2023.
As a result, there no longer is an income limit for applying the dividend exclusion. Thus, the dividend exclusion can exceed the entire net income.
Gross Income Tax Sourcing Rules
Prior to January 1, 2023, gross income tax apportionment for receipts from business income was based on a three-factor formula of property, payroll, and receipts. Sales of services were sourced under a cost-of-performance method.
For tax years on or after January 1, 2023, gross income tax apportionment is based on a single sales factor method and sales of services are sourced under a market-based sourcing method. Under market-based sourcing, service receipts are sourced based on where the benefit of the service is received.
A taxpayer has the right to apply for relief from the single-factor formula and is required to explain why the allocation schedule does not provide an equitable allocation, and provide a substitute method of allocation such as separate accounting for NJ and out-of-state operations.
If you have any questions or need assistance, please reach out to a professional at FORVIS.