N recently signed into law Assembly Bill tax, New Jersey has - PDF document

G Tax Alert August 2002 New Jersey’s Business Tax Reform Act Makes Major Changes to the State’s Taxation of Business Entities ew Jersey Governor James E. McGreevey are negligible. Because the AMA is not an income N recently signed into law Assembly Bill tax, New Jersey has announced that the AMA will 2501, designated the Business Tax Reform permit the State to assess a fair level of tax on Act (the “Act”). The Act makes major changes to foreign corporations that currently “exploit the New Jersey’s Corporation Business Tax (“CBT”) State’s marketplace,” but are exempted from the and other changes that, together, will affect nearly CBT by federal law. every entity doing business in the State. Most changes increase the level of entity tax; the Act is A corporation’s AMA will be determined using expected to add more than $1 billion per year to the a formula based either on gross receipts allocable to State’s tax revenues and was a key component of New Jersey or on gross profits (defined as gross the Governor’s plan to eliminate the State’s budget receipts less cost of goods sold) allocable to New deficit. Most provisions of the Act are effective Jersey, the choice between the two methods at the immediately, for taxable years beginning in 2002. election of the taxpayer corporation. (Any election must stand for five taxable years before it The changes to the business tax are numerous can be changed.) The availability of the gross and complex. Brief summaries of the chief revisions profits option is designed to avoid assessing an follow. unfairly high level of tax on high-gross/ low-margin companies such as retailers. Businesses with gross Corporate Alternative Minimum Assessment profits of $1 million or less or gross receipts of $2 The new corporate Alternative Minimum million or less are not subject to the AMA. Assessment (AMA) will apply to all corporations with an “economic presence” in New Jersey, except Companies subject to the CBT will calculate New Jersey S corporations, professional their tax liabilities under both the AMA and the corporations, investment companies, and CBT and pay the greater of the two. Those not “cooperatives” meeting certain requirements. subject to the CBT will pay the AMA. The AMA Currently, certain foreign corporations are not is scheduled to sunset (expire) for tax years subject to the CBT because federal law precludes beginning after June 30, 2006, but it will remain in any state from assessing an income tax on income place after that date for foreign corporations not earned by a foreign corporation from the taxing subject to the CBT. state, if the corporation’s activities within that state This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G New Jersey under the Act. Prior to the Additional Changes to CBT to Increase Revenue effectiveness of the Act, tax paid to New Jersey was based on a sales factor derived by dividing sales made in New Jersey by total sales, including Disallow Deduction For nowhere sales. The Act removes the nowhere sales Expenses Paid to Affiliates from the denominator of the sales factor fraction, The Act disallows the deduction of many resulting in tax being paid to New Jersey on a expenses when payments for such expenses are higher proportion of income. made to related parties. The State asserts that affiliated groups had employed such payments and New Minimum Corporation Business Tax deductions to shift income to states with low or no Prior to enactment of the Act, the CBT income taxes. The following expenses no longer imposed an annual minimum tax of $200 on both are deductible under most circumstances: domestic corporations and on foreign corporations “doing business” in New Jersey. The Act replaces Interest paid to a related party; and � that minimum with a CBT annual minimum of (i) Royalties and other intangible expenses � $2,000 for any corporation affiliated with a group paid to affiliates. that has an annual payroll of $5 million or more; and (ii) $500 for all other foreign corporations Partially Disallow doing business in New Jersey and all other domestic Dividends Received Exclusion corporations. Note that the annual minimum tax Before the Act, a corporate taxpayer could applies (as did the $200 minimum) to all domestic exclude all or a portion of dividends it received corporations, whether or not those domestic from other corporations, including subsidiaries. corporations actively conduct business during the Under the Act, a corporation may continue to year. exclude 100% of dividends received if they are paid by a subsidiary in which the taxpayer corporation New Filing Fees For Partnerships, has at least an 80% ownership interest. It may LLCs, and Professional Corporations exclude 50% of dividends received if they are paid The Act establishes new “filing fees” for entities by a subsidiary in which the taxpayer corporation treated as partnerships for federal income tax has at least a 50% (but less than 80%) ownership purposes (except those listed on a national stock interest. Dividends received from corporations in exchange), including general and limited which the taxpayer corporation has less than a 50% partnerships, limited liability companies, and ownership interest are not excludable. limited liability partnerships. Partnerships that have income from New Jersey sources and more Throwout Rule than two members will be required to pay an New Jersey businesses with sales to states in annual $150 per-owner filing fee, based on the which they are not subject to tax (so-called number of K-1s filed with the State, capped at “nowhere sales”) will pay a higher level of tax to $250,000 per entity annually.

G The Act establishes a similar filing fee of $150 2001 level and frozen. They will remain per licensed professional for professional frozen at the 2001 level through tax corporations that derive income from New Jersey year 2005. After 2005, the phase-out is sources and are comprised of more than two due to resume. licensed professionals. The professional In a concession to the smallest � corporation filing fees are also capped at $250,000 businesses, the CBT rate for per entity annually. corporations with net income of $50,000 or less will be reduced from Each entity required to pay filing fees for 7.5% to 6.5%. taxable year 2002 must at the time they are due make an additional payment of 50% of the amount Conclusion due as an installment payment toward the The Act also establishes a Corporation following year’s fees. Business Tax Study Commission, ensuring that there will be further discussion, publicity, and Payments on Behalf of changes. The changes thus far have been Partners and LLC Members sweeping; this Alert highlights only the general In addition to the filing fees, each partnership contours and provisions of the Act. (other than a qualified investment partnership and a partnership listed on a national stock exchange) To discuss how the Act may affect you and your that has income from New Jersey sources must business entity, please call your Lowenstein Sandler tax make a prepayment of income tax on behalf of each advisor at 973.597.2500. non-resident noncorporate partner (much like a withholding payment). The payment will be credited proportionally (with respect to share of net income and a special multiplier) to the separate accounts of the nonresident partners. Other Changes For 2002 and 2003, corporate net � operating loss carryover deductions are suspended (and their expiration periods tolled). In addition, net operating losses may no longer be carried over by a taxpayer that changes its state of incorporation. S corporation tax rates, which are in the � third year of a promised four-year-long complete phase-out, will be reset to the