On April 28, 2011, Gov. Chris Christie signed into law two tax bills (S. 2753, S. 2754) that change the way state business taxes are calculated and reported. The bills are designed to provide targeted tax relief, and promote business expansion and job growth by improving New Jersey's business climate.

Single Apportionment Factor

The first bill (S. 2753), addresses the three-factor formula that multistate corporations use to allocate income to New Jersey for tax purposes.  The three-factor formula, which provides for state apportionment based on a weighted average of property, payroll and sales within and outside the state,  will be replaced with a single sales factor formula, with the change being phased in over three years.

The phase-in of the new income apportionment formula for multistate corporations will begin with privilege periods that start in 2012, when the sales fraction will increase to 70 percent, from 50 percent, and the property and payroll fractions will each drop to 15 percent, from 25 percent under the current formula.

 

For privilege periods beginning in 2013, the sales fraction will increase to 90 percent, and the property and payroll fractions will each account for 5 percent of the apportionment formula.

 

For privilege periods beginning on or after Jan. 1, 2014, a corporation's New Jersey apportionment percentage will be calculated solely based on sales within and outside of New Jersey.

Alternative Business Income Netting

The second bill (S. 2754), through the creation of an "alternative business income calculation", will give small business owners who pay their taxes through personal income tax, some of the same benefits afforded taxpayers who pay the Corporate Business Tax.

The bill allows taxpayers to net a portion of gains and losses derived from four business-related categories of gross income: net profits from business; net gains or net income from rents, royalties, patents, and copyrights; distributive share of partnership income; and net pro rata share of S corporation income.  Taxpayers will be able to reduce taxable income by up to 50% of the decrease in income calculated by using the alternative business "netting" method versus the current law non-netting methodology.  In addition, if the alternative method generates an overall loss, this loss can be carried forward in computing future alternative business income for a period of up to 20 years.

The phase-in of the netting process begins with tax year 2012; taxpayers  will be permitted to subtract from taxable income 10% of the increment between income computed using the non-netting current  method and income computed using the alternative  netting method.  This income reduction will increase to 20% for tax year 2013, 30% for tax year 2014, 40% for tax year 2015 and will be fully implemented at a 50% reduction in 2016, and thereafter.

As with any new law, we would expect that further guidance and clarification will be issued by the State prior to the scheduled 2012 effective date.  Please feel free to contact us if you would like to discuss how these new laws may affect your own tax situation.