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On Friday, June 30, New Jersey lawmakers approved the state’s budget and enacted new legislation that would overhaul several provisions of the corporate tax system. The $54.3 billion budget was approved closely along party lines with contention, while the new provisions of the corporate tax system were approved unanimously without debate.

2024 Budget

Significant tax changes were made in the 2024 budget to help increase affordability for working and middle class families. One of the major programs that will receive funding through the new budget is the property tax relief program. Starting in 2026, seniors who have less than $500,000 in annual income will receive a credit for half of their property taxes up to $6,500.

To help expand educational opportunities, the new budget provides a record total of $11 billion in direct K-12 aid for public schools, $116 million in aid to advance universal pre-K, and $20 million in new investments to help ensure New Jersey has trained and dedicated teachers.

To help promote fiscal responsibility, the projected ending surplus from the 2024 budget is a record-breaking $8.3 billion. The budget also makes a full pension payment of $7.1 billion to public sector employees. Further, the budget puts additional funds into the Debt Defeasance and Prevention Fund to support important State infrastructure projects.

NJ Corporate Tax System Overhaul

One of the major changes in the state’s corporate tax overhaul is its treatment of the global intangible low-taxed income (“GILTI”) deduction.  The New Jersey GILTI deduction will increase from the IRC required 50% to 95%, putting New Jersey on par with other states who tax GILTI.

Additionally, the corporate tax overhaul bill switches the combined reporting method from Joyce to Finnigan. The Joyce method looks at each corporation in a combined group separately when determining if it is subject to tax in the state, while the Finnigan method views the entire group as taxable if one member of the group is taxable. Another change consistent with the combined reporting shift is to allow taxpayers to use prior net operating losses (“NOLs”) to offset income of any entity in the combined group instead of just the income of the entity that incurred the loss.

This bill also changes the treatment of NOLs to put New Jersey in line with the majority of states. Prior to this change, New Jersey required NOL deductions to be taken after the dividends received deduction. Now businesses can use an NOL before taking a dividend-received deduction. This change allows businesses to use a larger NOL because the dividends will no longer decrease the NOL.

Further, the bill amends the New Jersey statute of limitations, giving taxpayers and the Division of Taxation the ability to adjust NOLs for closed tax years. This will allow taxpayers and the Division the ability to determine the correct tax liability for open years. There is a 10-year limitation on assessments, and this change applies retroactively to tax years ending on or after July 31, 2022. This change is likely in response to a 2021 tax court ruling in R.O.P. Aviation Inc. v. Director, Division of Taxation that prohibited the Division from adjusting NOLs for closed tax years.

Additionally, New Jersey adopted the state’s economic nexus sales tax thresholds for Corporate Business Tax (“CBT”) purposes.  That is, companies that derive over $100,000 in receipts or make more than 200 sales in New Jersey would be deem to have nexus for corporate income tax purposes and are required to file a CBT return, unless they are exempt under P.L. 86-272.  Companies should be wary of this provision and consider their constitutional protections, particularly under the Due Process Clause, prior to conceding CBT liability.

Finally, the corporate tax overhaul bill also contains apportionment changes for income of partnerships – shifting from the current three-factor method of apportionment to a single sales factor apportionment method to allocate income.  Additionally, the bill adopts market-based sourcing instead of the current cost of performance sourcing for partnership income.

Taxpayers should reviews these changes and consider how the new budget and corporate tax overhaul affects them.  If you have any questions, please reach out to Jennifer Karpchuk (jennifer.karpchuk@chamberlainlaw.com) and Thu Lam (thu.lam@chamberlainlaw.com).