On Monday, July 3, 2023, New Jersey Governor Phil Murphy signed into law Senate Bill 3737/Assembly Bill 5323 (the Legislation), which significantly overhauls key aspects of the Corporation Business Tax Act (the CBT Act).
Retroactively effective for tax years beginning on or after January 1, 2022
Historically, under New Jersey law, no deduction was allowed for research and experimental (R&E) expenditures to the extent that those R&E expenditures were qualified research expenses or basic research payments for which an amount of credit was claimed, unless those R&E expenditures were also used to compute a federal credit. The legislation provides that a deduction for New Jersey R&E expenditures is allowed during the same privilege period for which a New Jersey credit is claimed. However, non-New Jersey research expenditures are deductible in the same manner and with the same timing as they are for federal purposes (i.e., amortized over a five- or fifteen-year period).
Effective for tax years beginning on or after January 1, 2023
The law provides that partnerships and sole proprietors are now required to use single sales factor sourcing. This change aligns the rules for partnership income apportionment with those applicable to corporations. For service providers this means sourcing is no longer based on where the work was performed. Instead, service providers apportioning income to New Jersey must use market sourcing, which looks to the location where the benefit of the service is received.
Effective for tax years ending on or after July 31, 2023
Economic Nexus standard
The Legislation adopts an economic nexus standard for corporate business tax purposes. A non- New Jersey corporation with receipts in excess of $100,000 from in-state sources or 200 or more separate transactions delivered to customers in New Jersey will be deemed to have substantial nexus. The bill makes clear that a corporation with sales/transactions below these thresholds may still have New Jersey nexus if the corporation’s exercise of its franchise in New Jersey is otherwise sufficient to establish jurisdiction.
Sunset of CBT Surtax
The New Jersey Legislature did not extend the 2.5% corporate tax surtax beyond 2023. The surcharge temporarily increased the tax rate from 9% to 11.5%. The surcharge was previously extended in 2021 and is set to expire on December 31, 2023.
The Legislation conforms to the federal 80% limitation on the use of NOLs.
The Legislation makes the following administrative changes:
- The due date for the New Jersey CBT return has changed to the 15th day of the month immediately following the month of the original due date for filing the taxpayer’s federal corporate tax return for the same tax year (or the 15th of the month following the month of the extended due date if extended for federal tax purposes)
- The installment payment safe harbor increased from $500 to $1,500.
Other New Jersey Items of Note
Beginning in tax year 2023, New Jersey will institute a new reciprocal “Convenience of the Employer Rule” targeting nonresident remote workers who work for a New Jersey-based business. This comes in response to New York’s convenience rule, which has cost New Jersey billions in tax credits for residents subject to New York’s income tax while telecommuting from New Jersey. The rule only applies if the reciprocal state also has a convenience rule.
Starting in 2026, a new property tax relief program will provide seniors earning less than $500,000 per year a credit for half of their property tax, up to $6,500.
DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update, and other related communications are intended to provide general information, as of the date of this communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.