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Nov 1993

N.J. business tax legislation enacted. (New Jersey) (State & Local Taxation)

by Sukel, Steven

    Abstract- A string of statutes have been passed in New Jersey in a bid to improve the tax environment for doing business and to foster job creation in the state. Chapter 173 provides for the recognition of the S corporation status. Like the New York statute, it calls for an affirmative election within a month of the Federal election due date. Another statute, the research and development tax credit which allows a credit against the Corporation Business Tax for R&D costs, is an incentive for manufactuirng and high technology businesses in the state. Investment tax credits for generating jobs and modernizing machineries, apparatuses and equipments are also allowed against the Corporation Business Tax for the purpose of enticing new manufacturing business to New Jersey and to reverse loss of jobs in the manufacturing sector. One new statute repeals the Business Personal Property Tax, while another adopts the Federal MACRS depreciation.

S Corporations

Chapter 173 recognizes S corporation status in New Jersey. The law is similar to the New York State statute, in that an affirmative election must be made within one month of the Federal election due date. To qualify for the election, the entity must be a Federal S corporation. All shareholders must consent to the election and jurisdiction. Individuals becoming shareholders subsequent to the initial election must also consent, or the corporation will be liable for the shareholders' tax liability. The election may be revoked on or before the last day of the first period to which the election would apply. For example, calendar-year S corporations must make the election on or before April 15, 1994, and may revoke the election on or before December 31, 1994.

There is a tax imposed at the entity level. The rate will be the difference between the highest gross income tax rate and the corporation business tax rate, including the applicable surcharge (9.375% - 7% = 2.375%). The distributive share will then pass through to the individual shareholder's New Jersey Gross Income Tax return via a newly established S corporation basket of income. The statute does not allow a credit on the taxpayer's Gross Income Tax return for either corporate entity taxes paid to other jurisdictions or for taxes paid on income allocated to New Jersey.

The statute follows the Federal basis rules, except it allows the taxpayer to increase basis in the S corporation for losses not utilized under the state statute disallowing the offset of income by losses in separate income categories. (NJSA 54A:5-3). Furthermore, the New Jersey statute has no provision akin to the Federal treatment of built-in gains.

To compensate for the anticipated revenue loss, the statute makes a number of changes in the Corporation Business Tax Act, N.J.S.A. 54:10A- 1, et seq. The changes include the disallowance of the deduction for taxes paid to other jurisdictions and their political subdivisions. Formerly, New Jersey only required an add back to Line 28 income for Corporate Business Taxes paid to New Jersey. The statute also provides for the disallowance of expenses related to nonoperational and nonbusiness expenses, including expenses incurred in years closed by statute. Finally, the statute amends the minimum tax provisions by phasing in an increase over four years from $25 for domestic corporations and $50 for foreign corporations to $200 for all corporations. The effective date of the S corporation legislation is for years beginning on or after the date of enactment.

Research and Development Tax Credit

In an effort to encourage manufacturing and high technology business in New Jersey, a new statute allows a credit against the Corporation Business Tax for research and development expenses. The statute generally "piggy-backs" the Federal provisions and allows a 10% credit for qualified research expenses made in New Jersey. The credit may not reduce the taxpayer's liability by more than 50% of the amount of tax otherwise due. Any unused credit amounts may be carried forward for a seven-year period. The credit takes effect for expenditures incurred in taxable years beginning on or after January 1, 1994.

Manufacturing Equipment and Employment ITC

In an attempt to attract new manufacturing business to the state and to stem a reported loss of approximately 100,000 manufacturing-sector jobs over the last three years, a new statue allows an investment tax credit against the Corporation Business Tax for machinery, apparatus, and equipment modernization.

The act calls for a permanent 2% credit of the investment in modernization applied to the Corporation Business Tax liability, with a maximum credit of $1 million per year. The life of the equipment must be four years or more, placed in service in New Jersey and used directly and primarily in the production of tangible personal property. The statue also provides for an additional credit available in each of the two subsequent years of potentially 3%, with a $1,000 per year cap for each new job created. The total credit taken for each year cannot reduce the taxpayer's corporate tax liability by more than 50% of the amount otherwise due. Also, a seven-year carryforward is permitted. The effective date of the legislation is tax years beginning on or after January 1, 1994.

New Jobs Investment Tax Credit

This statute allows a credit against the taxpayer's Corporation Business Tax liability equal to a percentage of the costs related to the purchase or lease of new buildings and certain new equipment. The amount of the credit varies depending on the number of new jobs created. The maximum credit is 10% of the expenses incurred. The calculation of the credit is complicated and subject to a formula based upon the kind of investment made and the number of new jobs created. The credit applies to expenditures through direct ownership or lease of buildings, building components, equipment, and capitalized start-up costs in new or expanded facilities in New Jersey.

Two conditions to the credit exist: First, the credit is only allowed under one statute. If a credit is taken under the Manufacturing Equipment and Employment Investment Tax Credit Act briefed above, no credit under this statute is available. Second, the amount is based upon the number of jobs created. The act permits a credit of .5% for each five jobs created by corporations with less than $6 million in gross receipts or $2 million in payroll and .5% for each 50 jobs created by corporations with over $6 million in gross receipts or $2 million in payroll.

The legislation provides that 20% of the credit is limited to offset 50% of the corporate tax liability. Any remaining credit may be used to offset up to 50% of the taxpayer's local real property tax liability resulting from the increased assessment due to the new building or equipment. Finally, 20% of the credit may be carried over to the next four years. The effective date of the act is the first tax year following the enactment date.

Business Personal Property Tax Repeal

This statute totally repeals the Business Personal Property Tax currently imposed at a 1.3% rate for each $100 of taxable value, for property placed in service prior to January 1, 1977. All property placed in service after that date was already exempt from the tax, while older property remained on the assessment roles.

Adoption of Federal MACRS Depreciation

This statute conforms the New Jersey Corporation Business Tax Act depreciation to Federal MACRS for property placed in service on or after the enactment date of July 7, 1993. Property currently depreciated under the ADR method will continue to be depreciated under the old method until disposed of or fully depreciated.

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