In a new law aimed to make the State of New Jersey more tax-friendly for corporate taxpayers, Governor Murphy recently signed Senate Bill 3737/Assembly Bill 5323 (Bill) that will allow C Corporations to take advantage of the dividend exclusion rules for Global Intangible Low Taxed Income (GILTI). While this is a favorable change to the current law, the same legislation repealed the Foreign-Derived Intangible Income (FDII) deduction, which will have an adverse impact on some corporate taxpayers. These changes are generally effective for tax years ending on or after July 31, 2023.
GILTI is a form of minimum tax on the current profits of Controlled Foreign Corporations, which was introduced with the 2017 Tax Cuts and Jobs Act (TCJA). Prior to this Bill, GILTI, as calculated for federal income tax purposes, was required to be included in the taxable income for New Jersey Corporation Business Tax (CBT) purposes and, similar to the federal treatment, 50% of it could potentially be excluded from New Jersey taxable income. The Bill will cause GILTI inclusions to be treated as dividend income for CBT purposes, allowing the dividend exclusion rules to apply (see below).
For CBT purposes, dividends paid to a C Corporation by a subsidiary that is 80% or more owned may be subtracted (fully or partially) from federal taxable income when computing New Jersey taxable income. The dividend exclusion rules generally allow up to 95% of the dividend paid to be excluded from the New Jersey taxable income if paid by an 80% or greater owned subsidiary. Otherwise, if the subsidiary is at least 50% owned by the taxpayer, 50% of the dividend paid may be excluded.
Accordingly, C Corporations required to include GILTI in their New Jersey taxable income with respect to foreign subsidiaries may see tax savings from the passing of this Bill.
Overall, the Bill will make New Jersey more competitive with its neighboring states, which have historically had more favorable regulations regarding GILTI inclusions. States such as Pennsylvania do not tax GILTI, and New York only taxes 5% of GILTI inclusions.
The TCJA also introduced a new deduction under Internal Revenue Code Section 250 for C Corporations, the Foreign-Derived Intangible Income (FDII) deduction. The FDII deduction equals up to 37.5% of FDII.
FDII is income derived by C Corporations from certain sales and/or services provided to persons who received the ultimate benefit outside of the U.S., based on a prescribed formula. Prior to this Bill, the FDII deduction, which was allowed on the federal tax return (by completing IRS Form 8993), was also allowed for New Jersey CBT purposes. With the passing of this Bill, C Corporations benefiting from the FDII deduction for federal tax purposes will no longer be able to claim this deduction on their New Jersey Corporate tax return.
Accordingly, this change will adversely affect C Corporations that derive a benefit from the FDII deduction.
Overall, corporations subject to the N.J. CBT and operating overseas via foreign subsidiaries (and therefore subject to the GILTI regime) rather than directly selling abroad (and therefore benefitting from the FDII rules) are likely to be the net winners of this legislation.
Please contact your Wilkin & Guttenplan P.C. advisor with any questions.