With the softening of the economy and a new democratic administration in New Jersey, the New Jersey legislature has attempted to close a widening budgetary gap by significantly broadening the scope of the New Jersey Corporation Business Tax. The new law, Chapter 40 of the Laws of 2002 (the “Act”), was approved and made effective on July 2, 2002.
Prior to this legislative change, the New Jersey Corporate Business Tax, N.J.S.A. 54:10A-2, taxed most “C” corporations on a portion of corporate net worth in accordance with a relatively standard allocation formula. The minimum tax due was $210.00 for calendar year 2001. For S corporations, the CBT was scheduled to be phased out as of June 30, 2006. Under the old statutory scheme, there was no significant state tax at the entity level for partnerships or joint ventures.
2. Changes Under the New Law.
A brief summary of the significant changes made by the Act is as follows:
A. “C” corporations.
For most “C” corporations, and through at least June 30, 2006, there is now an alternative minimum assessment (“AMA”) based on either gross receipts or gross profits. The taxpayer has the right to elect whether to use receipts or profits for purposes of this calculation, but must stick with such election for the following four year period.
After June 30, 2006, corporations with a New Jersey presence will need either to consent to the imposition of the CBT (which will require taxpayers to waive the existing protection under P.L. 86-272, 15 U.S.C. §381 et seq.) or continue to be subject to the AMA.
There are a number of other changes which are retroactive in most cases to January 1, 2002, including a reduction in the dividends-received exclusion, a deferral of net operating loss carryforwards, and a disallowance of certain research and development expenditures. In addition, interest expense deductions for related party transactions have been significantly curtailed.
In order to appease the New Jersey business community, the tax rates have been reduced for corporations with income under $50,000, from 7.5% to 6.5%, and there is a significant expansion of the New Jobs Investment Tax Credit. However, the minimum tax does increase from $210.00 currently to $500.00.
B. “S” corporations.
The CBT is currently being phased out with respect to New Jersey S corporations. However, the legislature elected to defer the phase out for an additional year, and to slow the reduction of the tax rate so that S corporations pay tax based on the rate of 1.33% through June 30, 2006, and .67% through June 30, 2007, at which point the tax on S corporations will be eliminated.
Pass-through entities such as partnerships and limited liability companies also have had their tax bill increased. As a result of the Act, New Jersey will impose a fee based on the number of partners for any entity with two or more partners.
The fee is $150.00 per person with the cap of $250,000.00. In addition, a substantive tax is imposed on non resident partners in such entities, at the rate of 9% for corporate entities, and 6.37% for individuals.
The foregoing is merely intended to be a brief summary of the provisions of the new legislation. The additional tax burdens should cause you to examine the status of any entities currently doing business in New Jersey. Please feel free to consult your KRLS counselor to pursue this matter in further detail.