New Jersey Revises GILTI Guidance, Opts Against a Millionaire’s Tax and Enhances Perks for Angel Investors

New Jersey recently released guidance and enacted legislation that presents challenges and opportunities for taxpayers conducting business in the state. The New Jersey Division of Taxation (DOT) issued and then substantially revised guidance on how multistate corporations should apportion global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) for purposes of the state’s Corporation Business Tax (CBT). The Garden State also concluded an eventful legislative session in which the legislature rejected the governor’s proposed millionaire’s tax, suspended the state's major corporate tax incentive program and boosted tax credits for certain angel investments.

GILTI Guidance – Take Two

On August 22, 2019, the New Jersey Division of Taxation (DOT) released Technical Bulletin No. TB-92, which provided additional state apportionment guidance as it relates to GILTI under Internal Revenue Code Sec. 951A and FDII under Sec. 250 for CBT purposes.

DOT originally issued Technical Bulletin No. TB-85(R), on December 24, 2018. In that release, New Jersey indicated that GILTI and FDII would be treated as ordinary income for CBT purposes, not as a dividend or deemed dividend. Also, TB-85(R) provided that a deduction for GILTI and FDII would only be allowed for specific taxpayers that utilized the deduction for federal tax purposes. Included in the original release was a special CBT sales factor sourcing methodology for taxpayers to apportion their GILTI and FDII. Specifically, New Jersey proposed a methodology that would apportion revenue related to GILTI and FDII that divided New Jersey Gross Domestic Product (GDP) by the GDP of the states in which the taxpayer was subject to state taxation. Essentially, the release revived the throw-out approach that was the subject of New Jersey litigation in Whirlpool Properties, Inc. v. Director, Division of Taxation and has been repealed since 2010.

Many taxpayers filing or requesting apportionment relief said the proposed apportionment methodology did not accurately reflect or report their GILTI and FDII attributable to the state. DOT responded by eliminating the special sales factor apportionment methodology for GILTI and FDII. Technical Bulletin TB-92 specifies that taxpayers must include their GILTI and FDII in their entire net income. GILTI and FDII are not treated as dividends or deemed dividend income for New Jersey CBT purposes. Rather, GILTI and FDII are treated as separate categories of income and are not treated as distributions from earnings and profits. GILTI and FDII are included in the sales factor apportionment and sourced as other business receipts to New Jersey.

DOT provided further guidance that GILTI and FDII must be reported on Schedule A. In order to compute the New Jersey apportionment factor on Schedule J, the net GILTI and the net FDII amounts are included in the denominator of the sales factor and included in the numerator only if applicable. The sales factor methodology outlined in TB-92 attempted to avoid/prevent distortion and ensured taxpayers arrive at a reasonable and equitable determination of New Jersey tax. Taxpayers yet to file a return for their 2018 tax year ending before July 31, 2019 or with a 2019 short period that ended before July 31, 2019 were advised not to complete Schedule A-6, which was previously used to calculate the allocated net GILTI and net FDII amounts for taxpayers. Taxpayers that filed their 2018 tax return utilizing TB-85(R) were advised that they may need to file an amended return to appropriately apportion their FDII and GILTI for CBT purposes.

 In TB-92, DOT said that taxpayers should include FDII and GILTI in the state factor if applicable.  But the tax agency has indicated that it is not aware of any circumstances when a taxpayer will use its GILTI and FDII in the numerator of its New Jersey apportionment formula. Though DOT indicated that it is in the process of drafting regulations to address New Jersey’s apportionment treatment of GILTI and FDII, no such regulations have been released to date.

No Millionaire’s Tax

On June 30, 2019, New Jersey Governor Phil Murphy signed the state’s fiscal year 2020 budget. Notably absent from the budget was the millionaire’s tax proposed by Murphy earlier in 2019 in his budget recommendations. For fiscal year 2019, New Jersey enacted legislation increasing the tax rate on individual income above $5 million from 8.97% to 10.75%. Previously, the 8.97% rate was applied to all income over $500,000.

For the current fiscal year (2020), Murphy proposed expanding the highest income tax bracket rate of 10.75% to include taxpayers with income over $1 million. Murphy estimated that the rate increase would have added $447 million in revenue to the state budget. However, in order to avoid a state shutdown, Governor Murphy relented to the New Jersey Legislature proposal allowing the budget to pass without the expanded bracket rate increase.

In 2018, New Jersey enacted legislation applying a tax rate of 10.75% to individuals with income over $5 million. The state also required employers to withhold 15.6% on amounts over $5 million.

Corporate Tax Incentive Program Suspended

On June 30, 2019, New Jersey Economic Development Authority’s largest incentive programs, Grow New Jersey Assistance and Economic Redevelopment and Growth Grant programs, which offered thousands of dollars per jobs in tax incentives, expired. Governor Murphy has lobbied for a complete overhaul of New Jersey’s tax incentives and has proposed several new programs. The proposed incentives include an annual $400 million cap on issuances; no cap previously existed.

Taxpayers currently receiving incentives or exploring the expansion of their business into New Jersey should be aware of the suspension of these two main incentive programs, and of the program’s potential overhaul.

New Legislation

• The legislature enacted a law exempting persons who own less than three units of rental property from collecting the new transient accommodations tax. This lifts a significant burden on persons renting their residences or other property through websites such as Airbnb. Rentals through Airbnb account for a substantial amount of revenue in New Jersey, between properties with access to New York City and shore-town properties.
• The previously enacted tax on medical cannabis will be phased out over three years. The tax will be reduced to 4% on July 1, 2020, 2% on July 1, 2021, and tax-exempt beginning July 1, 2022. Municipalities may tax transfers of medical cannabis up to 2%.
• The legislature enacted a measure implementing a temporary streamlined business dissolution and reinstatement program. A business entity that has had its charter revoked or that is on an inactive list may obtain reinstatement or termination to end its operations without having to request tax clearance or be liable for additional administrative costs and fees during a yet-to-be announced six-month period ending no later than June 15, 2020. Such entities must only pay a one-time fee of $500. About 370,000 business entities are in an inactive or revoked status in New Jersey’s business registry.
• The legislature amended the state’s neighborhood revitalization tax credit program, increasing the maximum allocation of credits from $10 million to $15 million, adjusting the definition of an eligible neighborhood, and making other minor changes.
• Benefits have expanded for angel investors making qualified investments in New Jersey technology companies. Qualified investments are now eligible for a 20% tax credit, as opposed to the previous 10%. Should the investment be located in a qualified opportunity zone or low-income community, the credit may reach 25%.

Conclusion

New Jersey’s recent legislation and its technical changes present significant challenges and opportunities for taxpayers conducting business in the state. As such, we strongly recommend that New Jersey taxpayers review their corporate tax return filing positions now to determine the appropriate filing position in the state to capitalize on new perks and avoid future pitfalls.