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Editorial 7 MIN READ

New Jersey's Corporation Business Tax entering 2017, examined

A 9% top rate, a minimum tax floor that ignores net income, and an S-corp quirk that still catches out-of-state founders

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 5 sections
  1. The 2017 landscape for NJ-nexus corporations
  2. The mechanics operators misunderstand
  3. The Transportation Trust Fund–era changes
  4. What remains uncertain at January 2017
  5. Sources

ew Jersey's top corporate rate is 9% on entire net income above $100,000, unchanged entering 2017. The more interesting numbers are underneath: a tiered minimum tax from $500 to $2,000 that is charged regardless of profit, and an S-corporation regime that still taxes part of the entity at the state level even after a clean federal election.

For a C-corp formed in Delaware and doing business in New Jersey, or an operating company incorporated in-state, the Corporation Business Tax (CBT) is the line item that matters more than the registered- agent invoice. The statute is N.J.S.A. 54:10A-5. The mechanics are in N.J.A.C. 18:7-3.4 and 18:7-3.6. Neither has moved for 2017.

The 2017 landscape for NJ-nexus corporations

The rate schedule on the 2016 CBT-100 — the form most calendar-year filers will file this spring — sets three brackets on adjusted entire net income allocable to New Jersey: 9% above $100,000, 7.5% between $50,001 and $100,000, and 6.5% at $50,000 or less. These are the brackets a New Jersey C-corp has faced since the 6.5% tier came in on January 1, 2002.

The Alternative Minimum Assessment, which briefly forced larger corporations onto a gross-receipts or gross-profits measure, has been a nullity for most filers since July 1, 2006. It still applies to foreign corporations claiming Public Law 86-272 immunity on their income. For everyone else it survives only as a carryover credit on Form 315.

Allocation has changed. For periods beginning on or after January 1, 2014, the factor is a single sales fraction — New Jersey receipts over receipts everywhere. And for returns beginning after July 1, 2010, the "regular place of business outside New Jersey" prerequisite for allocating less than 100% of income was removed. Before then, a corporation without a bona-fide out-of-state office could be forced to assign all of its net income to New Jersey. That trap is closed.

The throwout rule, added in 2002 to pull receipts allocated to non-taxing jurisdictions back into the New Jersey numerator, was repealed by P.L. 2008, c. 120, effective for privilege periods beginning on or after July 1, 2010. There is no throwback successor in force, though proposals have circulated in Trenton for years.

The e-file mandate, in force for tax years beginning on or after January 1, 2016, applies to every CBT return, estimate, and extension.

The mechanics operators misunderstand

Two pieces of the CBT catch founders who treat New Jersey as a federal-conformity state. They are not the same mistake.

The first is the minimum tax floor. Under N.J.A.C. 18:7-3.4 and instruction 11(d) of the 2016 CBT-100, every C-corp with a taxable status in New Jersey owes a minimum tax tied to New Jersey gross receipts, regardless of net income: $500 on less than $100,000 of receipts, $750 from $100,000 to under $250,000, $1,000 from $250,000 to under $500,000, $1,500 from $500,000 to under $1,000,000, and $2,000 at $1,000,000 or more. The S-corp ladder runs $375 / $562.50 / $750 / $1,125 / $1,500 against the same tiers. The minimum is not prorated; a November formation owes the full floor, and a mid-year dissolution owes it until the dissolution is formally filed. Zero returns are not accepted. For any member of an affiliated or controlled group under IRC §§ 1504 or 1563 whose total group payroll hits $5,000,000, the minimum is $2,000 for each group member, regardless of that member's own gross receipts.

Operating consequence: a newly formed C-corp that never opens a bank account owes $500 for its first short period and $500 every year thereafter until it cancels. A dormant subsidiary in a consolidated group with $5 million of payroll owes $2,000. Late-filing and late- payment penalties run 5% per month up to 25%, plus interest at 3% over the average predominant prime rate.

The second is the S-corporation problem. New Jersey does not automatically recognize a federal S election. Under the 2016 CBT-100S instructions, every corporation intending to be a New Jersey S corporation must file Form CBT-2553 — a separate state election, signed by every shareholder — within one calendar month after the federal S filing requirement. Miss the window and the corporation files as a C-corp in New Jersey for the year, even with a clean Form 2553 on file with the IRS.

Even when the state election is in place, the S-corp is not fully a pass-through at the state level. Under N.J.A.C. 18:7-3.6 and instruction 10 of the 2016 CBT-100S, a New Jersey S-corp pays 9% (or the bracketed 7.5% or 6.5%) on the portion of entire net income subject to federal corporate taxation — which, for most clean S corporations, means built-in gains, excess net passive income, and similar federally-taxed items. On the portion not subject to federal corporate tax — the ordinary pass-through income — the rate is zero, the result of a multi-step phase-down completed on July 1, 2007. Net pro-rata share flows through to shareholders under the Gross Income Tax; the S-corp must pay 8.97% at the entity on income allocated to nonconsenting nonresident shareholders.

The practical version: a New Jersey S-corp with no built-in gains and no passive-income issue pays the minimum tax and nothing else at the entity, while shareholders pick up the income on their NJ-1040s. An S-corp that never filed CBT-2553 pays 9% of its entire net income to New Jersey at the entity level, and shareholders still pick up the income individually. The second outcome is not rare.

The Transportation Trust Fund–era changes

Governor Christie signed P.L. 2016, c. 57, on October 14, 2016, after a summer of shutdown-era gridlock over the Transportation Trust Fund. The law does two things at once. It raises the Petroleum Products Gross Receipts Tax to fund the TTF reauthorization — adding roughly 23 cents per gallon to gasoline effective November 1, 2016, and lifting the PPGRT rate on non-motor fuels from 2.75% to 7%. And it offsets that increase with a package of other tax cuts.

The CBT is not in the package. The rate schedule does not move, the minimum-tax floor does not move, and the allocation formula does not move. What does move, on dates a New Jersey-nexus corporation will notice at other places on the return:

  • Sales and use tax. The combined rate drops from 7% to 6.875% on January 1, 2017, and to 6.625% on January 1, 2018.
  • Estate tax. The exemption rises from $675,000 to $2,000,000 for decedents dying in 2017, and the estate tax is repealed entirely for deaths on or after January 1, 2018. The separate inheritance tax remains.
  • Gross Income Tax pension exclusion. The joint-filer exclusion phases up from $20,000 over four years starting in 2017.
  • Earned Income Tax Credit. The state EITC rises to 35% of the federal credit.

For the owner of a New Jersey C-corp, none of that moves the corporate return. The Christie-era compromise bought highway funding without touching the CBT directly.

What remains uncertain at January 2017

The harder question is whether the CBT holds its shape through the 2017 legislative session. The Democratic majority has floated corporate-tax changes repeatedly since the throwout repeal — a throwback rule, a reversal of the 2011 S-corporation minimum cut, and a combined-reporting regime that would pull federally-consolidated groups onto a single New Jersey return. None has passed. None is dead.

The November 2017 gubernatorial race will determine whether any of this moves. A change in administration would put combined reporting back on the agenda immediately; the sitting governor has opposed it for seven years. A corporation making a multi-year New Jersey decision in January 2017 should model the current rules but avoid structures whose economics depend on single-entity reporting continuing past 2018.

The other uncertainty is federal. Tax proposals circulating at the end of 2016 — border adjustments, rate cuts, pass-through preferences — would, if enacted, cascade into the CBT through entire net income, which starts at federal taxable income before New Jersey modifications. Nothing has been introduced yet in the new Congress.

For a C-corp forming or maintaining a New Jersey presence in the first quarter of 2017, the 9% top rate and the $500-to-$2,000 minimum are the budget lines. For an S-corp, file CBT-2553 on time or pay 9% at the entity by default. Everything else on the return is noise around those two facts.

Sources

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