Our New York City CPA office helps clients in New Jersey, New York City and New York State navigate changes to the tax laws. Recently, the New Jersey Legislature passed a second income tax bill that would:
- impose a surtax on corporations;
- decouple from certain provisions of the federal Tax Cuts and Jobs Act; and
- reduce the dividend exclusion.
The first bill making similar changes (A.B. 4202) was passed by the Legislature on June 21, 2018. Although similar, the two bills are not identical. In addition, the second bill is tied to the first. In fact, the second bill would actually amend the first bill and only take effect if the first bill is enacted.
The second bill would also repeal or supersede provisions in the first bill that:
- impose a tax on certain dividends; and
- clarify treat provisions.
Surtax on Corporations
The first bill would impose a surtax on a corporation’s allocated net income. The second bill would change the type of income used to determine the surtax rate. Instead of “entire net income,” the second bill would use “allocated net income.”
As a result, if the second bill is enacted, the surtax would be equal to:
2.5% if the corporation has allocated net income between $1 million and $25 million; or
4% if the corporation has allocated net income over $25 million.
All other surtax provisions from the first bill would still apply.
Nonconformity with Federal Tax Reform Provisions
With respect to the Tax Cuts and Jobs Act, the first bill would create state income tax adjustments that:
- disallow federal deductions against the repatriation (transition) tax on accumulated foreign earnings
- disallow the 20% deduction for qualified business income from a pass-through entity
- apply the interest deduction limitation on a pro-rata basis to interest paid to both related and unrelated parties.
For the pass-through income deduction, the second bill would still decouple from federal law for corporation income tax purposes. However, unlike the first bill, it would not do so for gross (personal) income taxes too.
The second bill would still apply the interest deduction limitation on a pro-rata basis. However, it would use a slightly different approach than the first bill. In the first bill, the pro-rata application applies regardless of whether the related parties are subject to an addback. This provision is not found in the second bill. Instead, in the second bill, any interest that is not allowed as a deduction would be excluded from the calculation.
The provisions in the first bill concerning the repatriation (transition) tax would not be affected by the second bill.
Dividend Exclusion
Both bills would reduce the dividend exclusion amount for taxpayers receiving dividends from an 80% or greater owned subsidiary. However, the second bill would do this is two stages, while the first bill would do it in one.
In the first bill, the exclusion goes from 100% to 95% for tax years beginning after 2018.
In the second bill, the exclusion first goes from 100% to 90% for tax years beginning in 2017. Then, for tax years beginning after 2017, the 95% exclusion rate applies.
Dividend Tax
The first bill includes a new 9% tax on dividends a corporation receives from subsidiaries. However, the second bill would repeal the tax.
Treaties
The first bill also includes provisions clarifying the effect of treaties on New Jersey “entire net income.” The second bill would remove these provisions from state law.
If you have any questions related to New Jersey taxes, New York City taxes or New York State taxes contact our NYC CPA office in lower Manhattan.