Changes in Corporate Business Tax Will Increase Costs of Doing Business in New Jersey

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.     

1.  Background.   

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.     

C.  “Partnerships.” 

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.     

3.  Conclusion.   

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.