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THE NEW JERSEY BUSINESS TAX REFORM ACT
AUGUST 2002

The recently passed tax law in New Jersey affected corporations (both ”C” and “S”) and partnerships. The following are excerpts from the law which affect most taxpayers.

Alternative Minimum Tax. Corporations (other than S corporations, professional corporations, investments companies and co-ops) are now required to calculate two annual taxes: the traditional corporation business tax (“CBT”) and the new alternative minimum tax assessment (“AMA”) The must pay the larger of the two.

The AMA is a sliding-scale tax that is applied against the amount of a company’s gross receipts or its gross profits—the company is allowed to choose whichever one it prefers, but once the choice is made, it must continue with that choice for a total of five consecutive years.
The first $2,000,000 in gross receipts and the first $1,000,000 in gross profits are exempt under the AMA. More elaborate limits apply for affiliated groups of companies.

If the AMA exceeds the CBT, the company must pay the AMA instead of the CBT. The excess of the AMA over the CBT constitutes a credit that may be carried forward to reduce the CBT liability in a future year.

The AMA applies to tax years beginning on or after January 1, 2002, and is set to expire for tax years beginning after June 30, 2006.

Increased Minimum Tax. The minimum tax that all corporations must pay each year has been increased from $210 to $500 for tax year 2002 and thereafter, except for corporations that are members of affiliated or controlled groups with total payrolls of $5,000,000 or more, whose minimum tax will be $2,000.

A New Tax on Partnerships and Professional Corporations. All entities which are classified as partnerships for federal income tax purposes (e.g., partnerships, limited liability companies and limited liability partnerships), which derive income from New Jersey sources and which have more than two owners are now subject to an annual “filing fee” of $150 for each owner of an interest in the entity, up to a maximum of $250,000.

The Act establishes a similar filing fee of $150 per licensed professional for professional corporations with more than two licensed professionals. This fee is also capped at $250,000.

Partnerships and Their Nonresident Partners. The new law imposes a tax on all partnerships other than those listed on a national stock exchange. It’s New Jersey’s way of collecting taxes from nonresident corporate partners.

The amount withheld is allowed as a credit on the nonresidents’ New Jersey tax returns.

Tax Cut for Small Businesses. Prior to the new law, the tax rate for corporations with net incomes of $100,000 or less was 7.5% of entire net income (corporations with net incomes greater than $100,000 were and continue to be taxed at the traditional 9% rate). Under the Act, corporations whose entire net incomes are $50,000 or less will be taxed at a 6.5% rate.

Tax Rates on S Corporations. The tax on the income of S corporations was being phased out. The rate in effect for years ending on or after July 1, 2002 was .67% and for years ending on or after July 1, 2003, there was to be no tax at all.

That’s changed. For years ending on or before June 30, 2006, the rate will be 1.33%; for years ending on or after July 1, 2006 but on or before June 30, 2007, the rate will be .67%; and for years ending on or after July 1, 2007, there will be no tax.

Allocation of Income—The Sales Fraction.
Multi-state companies may no longer include in the denominator of their sales fraction receipts assigned to another state or foreign country where the taxpayer is not subject to tax on, or measured by, profits or income, business presence, or business activity. This will effectively drive up the sales fraction for many companies doing business in other states, and that will drive up the amount of their income which is subject to tax in New Jersey.

Dividends Received. Historically, corporations have been allowed to exclude from income 100% of all dividends received from 80%-or-more owned subsidiaries and 50% of all other dividends included in federal taxable income. Under the new rules, the 100% rule remains in tact, but the exclusion of 50% only applies to dividends received from entities in which the corporation owns 50% or more of the stock.

Net Operating Loss Carryover Deduction. For tax years beginning in 2002 and 2003, corporate taxpayers are not allowed to deduct net operating loss carryovers. Losses which may be carried forward for two years beyond the current seven year carry forward period.

Bonus Depreciation. The 30% bonus depreciation which is permitted under federal tax law is not longer allowed for New Jersey purposes.

New Jobs Investment Tax Credit. This credit was formerly available to “small business taxpayers.” It is now available to mid-size business taxpayers as well—those with annual payrolls of $5,000,000 or less (up from $6,000,000).

In addition, the applicable jobs factor has been adjusted. It’s now .01 (no longer .005), and the jobs factor is capped at .20 (previously .10).

This Tax Alert is intended only as a summary of some of the Act’s provisions—those for which we think there may be a wide level of interest. There are indeed provisions that we have not addressed here.


Q&A CORNER

Q. We have just taken over the payroll operations for several offices in three different states. All of the new offices pay employees on different schedules and we wanted to pay everyone on the same biweekly pay schedule that we use for our home office. Are there any procedures we need to follow to do this?

A. Use caution before you change pay frequency for your multistate offices. Many states have laws defining how often an employee must be paid. Connecticut, for example, requires that employees be paid on a weekly basis, but exceptions to this rule are allowable with approval from the labor commission. Check the requirements of each state before you make the switch. You might also want to clear it with HR before you change pay frequency so they can smooth the transition with the employees.