The New Jersey Division of Taxation (the “Division”) has released long-awaited guidance concerning the recent statutory amendments to the Corporation Business Tax (“CBT”).1 Those amendments include provisions involving federal tax reform and New Jersey’s switch from separate-company to combined reporting. (Our prior coverage of the legislative amendments is available via our alerts.) Although the Division’s new guidance largely follows the text of the amended statute, there are a number of key takeaways.
Surtax. Taxpayers whose apportioned taxable net income exceeds $1 million must pay a new surtax of 2.5% for 2018 and 2019 and 1.5% for 2020 and 2021.2 Under the plain language of the statute, “any business entities” subject to CBT are liable for the surtax, which could potentially include partnerships and S corporations. In TB-84, however, the Division clarifies that the surtax does not apply to either partnerships or S corporations.3
Addback for related-party interest and royalties. Under prior law, a deduction for related-party interest and royalty expense was allowed as long as the affiliate was located in a foreign country with a tax treaty with the United States.4 But the Legislature limited this so-called treaty exception by requiring the affiliate to pay tax on the income stream at an effective tax rate within 3% of the payor’s New Jersey effective tax rate.5 As a result of the new surtax, the maximum statutory CBT tax rate in New Jersey is 11.5% for 2018 and 2019.6 If the 3% safe harbor for purposes of the treaty exception were applied to the payor’s effective tax rate with the surtax, certain taxpayers might not have been able to qualify for the addback exception. But TB-84 clarifies that the surtax is not considered in applying the treaty exception. Specifically, the Division states that the income stream of the foreign affiliate must be taxed at an effective tax rate equal to or greater than 6%.7