Following are some of the major changes that may impact you and/or your business.
New Jersey Increases Maximum Gross Income Tax Rate for Individuals and Makes Other Changes
Governor Phil Murphy has signed legislation that increases the maximum gross income tax rate for individuals and makes other changes.
Tax rate increase. For the 2018 tax year, the law increases the highest rate to 10.75%. This rate will apply on taxable income in excess of $5 million, regardless of the filing status of the taxpayer. For taxable year 2018, withholding by every employer from salaries, wages and other remuneration paid by an employer for services rendered in excess of $5 million during 2018, should be at the rate of 15.6% as soon as practicable but no later than September 1, 2018. No additions to tax or penalty will be imposed for insufficient payment of estimated tax that may otherwise be due before September 1, 2018, as a result of these changes.
Property tax deduction. For tax years beginning after 2017, the maximum itemized property tax deduction for a resident taxpayer is increased from $10,000 to $15,000.
Earned income tax credit. The earned income tax credit percentage is increased from 35% to 37% of the federal tax credit in 2018, 39% in 2019 and 40% for 2020 and thereafter.
Child and dependent care credit. For tax years beginning after 2017, a taxpayer who is allowed a federal child and dependent care credit will be permitted to claim a state tax credit of up to 50% of the federal credit for taxpayers with New Jersey taxable income of $60,000 or less.
Carried interest provisions. An additional surtax of 17 % will apply on income from investment management services received during the taxpayer’s taxable year. However, this provision will not be operative until similar legislation is approved by Connecticut, Massachusetts and New York.
Decouple federal pass-through deduction. The federal deduction for certain pass-through income under IRC Section 199A is not available.
Tax amnesty. The Division of Taxation is required to provide a 90-day tax amnesty to end on or before January 15, 2019. The amnesty will cover taxes due on or after February 1, 2009 and prior to September 1, 2017. A taxpayer can pay the tax, 50% of the interest due and avoid all penalties except for civil and criminal fraud. A 5% non-participation penalty will be added to tax deficiencies that were eligible for the amnesty and discovered after the amnesty period.
New Jersey Temporarily Increases CBT Rate, Provides for Combined Reporting and Makes Other Significant Changes for Businesses
Governor Phil Murphy has signed legislation that provides for: (1) temporary increases to the corporation business tax rate; (2) mandatory combined reporting; (3) sourcing of services based on where the benefit of the services is received; (4) a deduction based on an increase in the deferred tax liability resulting from unitary reporting and (5) other changes.
Temporary increases to the corporation business tax rate. Corporations, except for public utilities, with allocated net income in excess of $1 million for the 2018 and 2019 tax years will be charged a surtax of 2.5% (9.0% to 11.5% rate). The surtax is 1.5% for the 2020 and 2021 tax years (10.5% rate).
Mandatory combined reporting. Combined return filings: Effective for tax years beginning after 2018, a combined group must file a combined unitary tax return in the form and manner prescribed by the Division of Taxation. The managerial member of the combined group must file the combined unitary tax return on behalf of the taxable members of the combined group and must pay the tax on behalf of such taxable members. The managerial member is authorized to file taxable member returns, file taxable member extensions for filing, pay taxable member liabilities, receive taxable member findings, assessments, and notices, make and receive taxable member claims, or file taxable member protests and appeals. Each taxable member of a combined group must determine its entire net income as its share of the entire net income of the combined group in accordance with a unitary tax return. The term “combined group” refers to the group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to the corporation business tax. The term “common ownership” means that more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether or not the owner or owners are members of the combined group. A “unitary business” is a single economic enterprise, which the Division of Taxation is authorized to interpret to the broadest extent.
Water’s edge, worldwide and affiliated group combined reporting. The default combined group reporting is water’s edge (a defined group of U.S. and certain foreign corporations). However, the managing member of a combined group may elect to have the combined group income determined on a worldwide basis or to report as an affiliated group, which may include members who are not part of a unitary business.
Joint and several tax liability: Each taxable member of a combined group is jointly and severally liable for the tax due from any taxable member whether or not that tax has been self-assessed, and for any interest, penalties, or additions to tax due.
Sourcing rules modified. For tax years beginning after 2018, sales of services will no longer be sourced based on where the services are performed. Under the new law, if the benefit of the service is received at a location in New Jersey, the receipts are sourced to New Jersey. If the benefit of the service is received both at a location within and outside New Jersey, the portion of the sale that is allocated to New Jersey is based on the percentage of the total value of the benefit of the service received at a location in New Jersey or a reasonable approximation to the total value of the benefit of the service received in all locations both within and outside New Jersey. If the state of services cannot be determined for a customer who is an individual that is not a sole proprietor, the default is the customer’s billing address. If the state of services cannot be determined for customers other than individuals, the default is the location from which the services were ordered; then, the billing address.
Deferred tax deduction. For publicly traded companies, if the combined reporting provisions result in certain financial statement reporting changes, the combined group may be entitled to a deduction over a ten-year period.
NOL’s and tax credits. A converted NOL prior to the combined reported can only be used by the member which generated it. However, a similar rule does not apply to tax credits within the combined group.
Dividend exclusion. For the period beginning after December 31, 2016, the dividends received deduction for more than 80% subsidiaries will be reduced to 95%.
Penalties and interest. No penalties or interest will accrue for underpayment of tax for the provisions applying retroactively to tax years beginning on or after January 1, 2017, that create an additional tax liability. However, the additional payments must be made by either the second next estimated payment subsequent to the enactment or by the first estimated payment due after January 1, 2019 for tax years beginning on or after January 1, 2018.
Research and development credit. For tax years beginning after 2017, the provision has been modified to provide that this credit is not refundable.
FOR MORE INFORMATION on how these changes may impact you, call your tax professional at Isdaner & Company, LLC at 610.668.4200.