Reed Smith Client Alerts

On July 3, 2023, Governor Phil Murphy signed substantive tax legislation into law that amends the corporation business tax statute.1 The legislation is a compromise between the Division of Taxation and the business community, and should be viewed as a win-win for both parties.2 Our prior coverage is available on Here’s what you should know about the legislation.

Summary of Statutory Changes

Sharing of prior net operating losses. With combined reporting, New Jersey shifted from a pre-apportioned to a post-apportioned net operating loss deduction starting with the 2019 tax year.3 Pre-apportioned loss carryovers had to be converted to post-apportioned carryovers (called prior net operating loss conversion carryovers or “PNOLs”).4 But under the original combined reporting provisions,5 PNOLs could generally be used only by the taxpayer that created them.6 So, PNOLs could be trapped in entities that couldn’t use them because of low New Jersey apportionment. This was a particular problem for loss entities whose New Jersey apportionment decreased following the switch to single-factor market sourcing or because of the elimination of intercompany sales under combined reporting.

By contrast, effective for the 2023 privilege period, the amendments allow members in a combined group to share their PNOLs with other members.7 This represents a major policy shift and should prevent PNOLs from becoming trapped. Importantly, taxpayers with valuation allowances on their PNOLs may be able to adjust their deferred tax assets for financial statement purposes.

Shift from Joyce to Finnigan. The Division of Taxation’s policy (pre-amendments) is that Joyce applies to combined groups that elect to file on water’s-edge or worldwide basis.8 So, the group’s sales-fraction numerator includes only New Jersey receipts earned by taxable members that have New Jersey nexus and are not protected by P.L. 86-272.