On Oct. 4, 2018, New Jersey adopted several changes to the New Jersey Corporation Business Tax including requiring combined reporting for tax years ending on and after July 31, 2019. This requires companies that have common ownership and are engaged in a unitary business to file a combined New Jersey return if at least one of the entities is subject to New Jersey Corporation Business Tax.
Each combined group has to include a taxable member designated as the managerial member. If the group has a common parent that's a taxable group member, the common parent must register as the managerial member. If the common parent is not a taxable member, the combined group must designate a taxable member as its managerial member.
Under the combined reporting rules on New Jersey, the managerial member of the combined group is required to register with the New Jersey Division of Taxation. The registration will generate an identification number that will be used as the combined group's tax identification number. The managerial member's pre-existing New Jersey tax identification number cannot be used as the primary identification number for the combined group. The election to be the managerial member of the combined group is valid for ten tax years.
The managerial member is required to address all tax matters for the group including filing tax and amended returns, extensions, estimated payments, and responding to notices and assessments for the combined group.
Each taxable member of the combined group must determine its share of the combined net income from the unitary business of the entire group, which is the sum of the incomes from both taxable and nontaxable group members. The combined group income is allocated to each taxable member according to its sales allocation factor. The numerator of the allocation factor for each taxable member is the amount of its receipts allocated to New Jersey while the everywhere sales number is the total combined receipts of the entire group. New Jersey appears to follow the Joyce Rule for determining its sales factor.
The managerial member of the combined group may make a binding election to file on a worldwide basis or an affiliated group basis. An affiliated group election will include all members of the affiliated group, regardless of whether there is a unitary business relationship. An affiliated group is defined by IRC §1504 except the group includes all domestic corporations owned by any member of the group. These members do not have to be included in the same federal consolidated return, can be in one or more unitary businesses, and/or include corporations not engaged in a unitary business with any member of the group. A water's-edge basis is required absent any election for an alternative method. The election is valid for the year elected and the five succeeding tax years.
Additionally, for tax years beginning in 2019 and beyond, New Jersey will follow market-based sourcing for receipts derived from the sale of services. These receipts will be allocated to New Jersey based on the percentage of the total value or "a reasonable approximation" of the total value received in New Jersey. If the relative value cannot be determined, the benefit of the service will be deemed to be received at the customer's billing address. If that cannot be determined either, additional methods of sourcing exist.
UHY Advisors has state and local tax professionals to help you identify and quantify the impact this change will have on your client's business and can help you meet the challenge of this new environment. Contact your local UHY professional at one of our many locations.