For calendar year taxpayers, the first return under New Jersey’s combined reporting regime is due on extension on November 16, 2020.1 But just this week, Governor Phil Murphy signed legislation making a number of substantive and technical amendments to New Jersey’s combined reporting statute.2 And because certain elections made on initial combined returns are binding in subsequent tax years, taxpayers need to carefully consider any filing positions.
To assist taxpayers in preparing their New Jersey corporation business tax (“CBT”) returns, we have summarized the key aspects of the new legislation as well as potential filing positions that taxpayers should consider. For a more detailed discussion of the issues, please see our webinar with Alan Kline, New Jersey’s Counsel to the Director, on youtube.com.
- Dividends Received Deduction. Prior to the statutory amendments, the Division’s informal policy was to limit the dividends received deduction of a taxpayer filing as a part of a combined return based on its share of the combined group’s New Jersey receipts. For example, if a taxable member received a dividend from an overseas affiliate but the taxable member accounted for only 10% of the group’s total New Jersey’s receipts, the Division’s position was that only 9.5% of the dividend qualified for a DRD (rather than the 95% DRD provided in the statute). The statutory amendments prevent this result by clarifying that the DRD does not vary according to the payee’s New Jersey apportionment.3 Although the statutory amendment is effective beginning in 2020, the Division has agreed to change its policy and extend the same treatment to the 2019 tax year.4
- Be wary of the affiliated group election. A combined group can file on a water’s edge, affiliated group, or worldwide basis,5 and the election is binding for six years.6 But taxpayers should take heed that the Legislature has amended the definition of “affiliated group,” making it more expansive than the federal definition.7 As a result, a New Jersey affiliated group now includes “any [commonly owned] entities incorporated or formed under the laws of a foreign nation that are required to file federal tax returns if such entities have effectively connected income within the meaning of the federal Internal Revenue Code.”8 This amendment means that a New Jersey affiliated group could include foreign corporations that were not includable corporations for federal purposes.
- Federal Consolidated Return Regulations. When it initially enacted combined reporting, the Legislature specifically incorporated only a portion of the federal consolidated return rules—those codified under Treasury Regulation § 1.1502–13.9 The new CBT amendments clarify that all principles and provisions set forth in federal regulations promulgated pursuant to I.R.C. § 1502 apply to the extent consistent with the CBT.10
- New net operating loss rules. Historically, New Jersey’s NOL rules were separate and distinct from the federal NOL rules. This no longer seems to be the case. The new CBT amendments provide that “[t]he federal rules and regulations governing federal consolidated return net operating losses and net operating loss carryovers shall apply to New Jersey net operating loss carryover[s].”11 The impact of this provision may be substantial. New Jersey’s NOL rules were not particularly taxpayer friendly. For example, NOL carryovers were reduced to the extent that a taxpayer received a dividend.12 This may no longer be the case under the new statute.
- Investment Companies, REITs, and Banking Corporations. The Legislature has adopted the Division’s policy that investment companies and real estate investment trusts are not part of a New Jersey combined group (as set forth in Technical Bulletin 86).13 In addition, the Legislature has clarified how banking corporations should file as part of a New Jersey combined group. These banking statutory provisions are also consistent with the Division’s policy in Technical Bulletin 91.14
- Return Due Date. Because of New Jersey’s automatic-extension rules,15 the due date for most calendar-year taxpayers to file their CBT return was October 15. But starting in 2016, the extended due date for federal income tax purposes was extended from September 15 to October 15. To provide taxpayers with a full 30 days after the federal due date to prepare their New Jersey return, the new legislation provides a new due date for filing CBT returns: 30 days after the federal return due date.16