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New Jersey Issues Changes That Impact 2019 Returns

by Alex Thacher

Summary

A new law in New Jersey makes technical corrections and substantially changes parts of the Corporation Business Tax Act (CBTA), affecting returns due November 16, 2020.

In Detail

SB 3007 was signed November 4, 2020, by Governor Murphy. This bill amends the CBTA enacted as P.L. 2018, c.48. No penalties or interest will apply to the first tax period affected by the bill, however, additional estimated payments must be made by the second estimated payment after the bill or the second payment due after January 1, 2021. The key changes made by SB 3007 are as follows:

Net Operating Losses (NOLs)

  • Prior NOL carryovers can be sold between members of a group at arm’s-length pricing.
  • A group member with NJ nexus can take its share of NOL carryforward with it if/when it leaves the combined group.
  • There is survival of NOL carryforwards between merging parties if both parties would have been combined group members within one reporting period of the merger.
  • NJ conforms to IRC provisions regarding transfer of NOLs and carryovers such as outlined in IRC Sections 381 and 382 for tax years beginning on or after January 1, 2020.

Dividends Received Exclusion (DRE)

  • Dividend income and its related exclusion should be apportioned using the combined group’s apportionment factor for tax years ending on or after July 31, 2019.

Combined Filing

  • Foreign companies with effectively connected income can be included in an affiliated group. The affiliated group election is one method of filing and is binding for six years.
  • The CBTA rate is determined as if the combined group was a single taxpayer.
  • Combined group allocated income should be used as a base for the 2.5% surtax for tax years beginning on or after July 31, 2020.
  • AMT credit can be used against the combined group’s tax liability.
  • Income recognized from a deferred intercompany transaction is not included in combined group income, but instead is recognized in the separate company recognizing the gain.
  • Combined groups should not include income of a public utility member in the combined tax base for the surtax.

Research and Development (R&D) Credits

  • Basic research payments for purposes of the R&D tax credit now include payments to an energy research consortium for energy research.

Controlling Interest Transfer Taxes and Bulk Sales Provisions

  • Intercompany transactions between combined group members that occur on or after January 1, 2021, are not subject to the controlling interest transfer tax and bulk sale reporting and escrow provisions do not apply.

Technical Corrections

  • Many technical corrections were made to provide more clarity regarding the CBTA. Please view the text of the bill for more details.

Insights

The changes related to NOLs, the DRE, combined reporting and R&D credits affect NJ tax returns due November 16, 2020. Talk to your tax professional to determine the impact on your organization.

If you have any additional questions, contact our experts.

November 11, 2020

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Authors
Alex Thacher - Partner, Tax - San Jose, CA | Armanino
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