On July 1, New Jersey Governor Phil Murphy (D) signed the state’s fiscal year 2019 budget after long negotiations with the legislature. Below is a summary of the key highlights regarding tax changes in the new budget that CPAs need to be aware of.
Corporate Business Tax
The budget imposes a temporary corporate income tax surcharge of 2.5% for the 2018 and 2019 tax years and a 1.5% surcharge for 2020 and 2021. These surcharges apply to corporate taxpayers with New Jersey allocated net income exceeding $1 million.
Combined reporting is now mandatory for commonly owned corporations operating a unitary business. Common ownership exists if more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners. The group may elect to file on a worldwide basis or a U.S.-affiliated group basis. This is effective for tax years beginning after 2018.
There is also a new market-based sourcing rule for service revenue. Service revenue will be sourced to New Jersey if the benefit of the service is received in New Jersey. If the benefit is received both within and outside New Jersey, a portion of the revenue will be allocated to New Jersey based only on the percentage received in New Jersey. This is effective for tax years beginning after December 31, 2018.
The dividend received deduction has been reduced. New Jersey entire net income (ENI) will exclude 95% of dividends paid (or deemed paid) for federal income tax purposes to the extent that the taxpayer owns 80% or more of the dividend payor. Internal Revenue Code (IRC) section 965 defines “deemed dividends” for purposes of this provision. This change is effective for tax years beginning after December 31, 2017.
Personal Income Tax
The highest marginal personal state income tax rate has increased to 10.75% for individual taxpayers with income of $5 million or more; this change is effective for 2018. In addition, income tax withholding by employers from wages, salaries, and other remuneration that exceed $5 million for 2018 should be at a rate of 15.6% beginning immediately, but not later than September 1, 2018. No penalties will be imposed for insufficient payment of estimated tax due on salaries, wages, and other remuneration received before September 1, 2018.
The property tax deduction for resident taxpayers has increased from $10,000 to $15,000, effective for tax years beginning after December 31, 2017.
The earned income tax credit has increased from 35% to 37% of the federal tax credit for 2018. The amount is 39% for 2019 and 40% for 2020 and later years.
An additional surtax of 17% will apply on income from investment management services received during a tax year; however, this provision will not be operative until similar legislation is approved by the states of Connecticut, Massachusetts, and New York.
Sales and Use Tax
Short-term housing rentals such as Airbnb will now be subject to New Jersey sales tax. A new surcharge will be imposed on ride sharing services such as Uber and Lyft. There is also a new tax on e-cigarettes and liquid nicotine.
Film Tax Credit
The Garden State Film and Digital Media Jobs Act has been enacted and provides tax credits for the production of film, television, and digital media content in New Jersey. The tax credits are based on certain expenses incurred while filming in New Jersey and apply to both the corporate business tax and gross income tax. The act also provides other incentives for production companies to hire diverse casts and crews in New Jersey.
Tax Amnesty—Dates Pending
The budget requires the New Jersey Division of Taxation (DOT) to hold a 90-day tax amnesty program. While the program dates have yet to be issued, the law requires that the amnesty period is not to exceed 90 days and is to end no later than January 15, 2019. The amnesty applies to state tax liabilities for tax returns due on or after February 1, 2009, and prior to September 1, 2017. Taxpayers that qualify will pay the tax due and one-half of the interest due as of November 1, 2018; all other fees and penalties that would otherwise be due will be waived. Failure to participate in the amnesty program will subject taxpayers to an additional penalty of 5%. This additional penalty is statutory and cannot be subject to waiver or abatement.
Evaluating the Potential Impact
CPAs should assess the financial impact of New Jersey’s new tax provisions on both corporate and individual clients, with emphasis on those provisions taking effect in 2018. For corporations, CPAs should evaluate how mandatory combined reporting and the switch to market-based sourcing for revenue from services will affect their New Jersey tax liability. For individuals, CPAs should assess how the new top marginal tax rate may affect them for 2018 and future years. Finally, CPAs should review any potential past tax exposure issues for their clients and, if applicable, consider the benefits of coming forward under the amnesty program.