Significant New Jersey Tax Changes and an Amnesty Opportunity
The Democratic legislature and Gov. Phil Murphy reached a budget agreement recently that included significant tax changes to the tax laws. Here is a summary of some of the major tax changes:
Major changes include:
Mandatory combined reporting for the corporation business tax (“CBT”) along with increased rates.
Increase in personal income tax rates on individuals making greater than $5,000,000.
A tax amnesty program that provides for a 90-day tax amnesty period to run through no later than January 15, 2019.
Gross Income Tax
The gross income tax (i.e., New Jersey personal income tax) is impacted in several ways, including:
Sets a new top income tax bracket in New Jersey of 10.75% for income exceeding $5 million.
Reshapes the employer withholding requirements for those same higher earning individuals.
Decouples from providing any form of the federal pass-through business income deduction pursuant to Internal Revenue Code Section 199A, pursuant to the recent federal tax changes.
Corporation Business Tax
Imposes a surtax on taxpayers with greater than $1,000,000 of New Jersey allocated income for the next four tax years beginning on or after January 1, 2018.
Applicable to tax years beginning on or after January 1, 2017, decouples from any deduction provided under the federal Tax Cuts and Jobs Act for income repatriated to the U.S. under Internal Revenue Code Section 965.
For tax years beginning on or after January 1, 2018, the interest deduction limitation of Internal Revenue Code Section 163(j) will be applied on a pro-rata basis to interest paid to related and unrelated parties.
Adopts mandatory unitary combined reporting effective for periods beginning on or after January 1, 2019.
Changes to market sourcing for services for periods beginning on or after January 1, 2019. Services will be sourced to the location where the benefit of the service is received.
Notes that there will no penalties on underpayments resulting from these changes for tax years beginning on or after January 1, 2017.
While still pending, it is expected that a law will be enacted consistent with the U.S. Supreme Court’s decision in Wayfair v. South Dakota, with an expected effective date of October 1, 2018.