Division of TaxationThe federal Tax Cuts and Jobs Act, (P.L. 115-97) was signed into law on December 22, 2017, and contained numerous changes to the federal Internal Revenue Code (IRC).
Sections of the Code require U.S. shareholders of certain foreign corporations to pay tax on previously untaxed earnings of those companies. This Q&A explains how the Code applies to New Jersey Gross Income Tax and focuses on IRC 搂965 deemed repatriation dividends and IRC 搂951A global intangible low-taxed income (GILTI).
How is income under IRC 搂965 reported for New Jersey Gross Income Tax purposes?
Dividends are an enumerated category of income. Therefore, deemed repatriation dividends reported under IRC 搂965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes.
When is a taxpayer required to pay the tax resulting from the IRC 搂965 income inclusion?
Income reported under IRC 搂965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes. 聽Taxpayers are required to pay their New Jersey tax liability at the same time that the IRC 搂965 income is included in New Jersey gross income.
IRC 搂965 Income Tax payments must be paid timely. New Jersey law does not provide for any deferment of payment or the installment payment method.聽 Therefore, New Jersey does not follow IRC 搂965(h), IRC 搂965 (i), or any other federal election to defer payment.
How is income under IRC 搂965 reported for a sole proprietorship?
Deemed repatriation dividends reported under IRC 搂965 for a sole proprietorship are reported in the same tax year and in the same amount as for federal purposes. 聽Sole proprietors should report this income as Net Profits from Business on the Sexy真人-1040.
Is the IRC 搂965(c) deduction allowed for a sole proprietorship?
No. The New Jersey Gross Income Tax Act does not allow for the IRC 搂965(c) deduction or any similar deduction. The IRC 搂965(c) deduction is a participation exemption designed to create an effective federal tax rate, and therefore, is not an allowable deduction for New Jersey Gross Income Tax purposes.
How is income under IRC 搂965 reported by a partner in a partnership?
Deemed repatriation dividends reported under IRC 搂965 flow through a partnership and are reported in the same tax year and in the same amount as for federal purposes.
Partners should report this income as Distributive Share of Partnership Income on the Sexy真人-1040.
Is the IRC 搂965(c) deduction allowed for a partnership?
No. The New Jersey Gross Income Tax Act does not allow for the IRC 搂965(c) deduction or any similar deduction. The IRC 搂965(c) deduction is a participation exemption designed to create an effective federal tax rate, and therefore, is not an allowable deduction for New Jersey Gross Income Tax purposes.
How is income under IRC 搂965 reported by a shareholder in an S corporation?
Deemed repatriation dividends reported under IRC 搂965 flow through an S corporation and are reported in the same tax year and in the same amount as for federal purposes.
Shareholders should report this income as Net Pro Rata Share of S Corporation Income on the Sexy真人-1040.
Is the IRC 搂965(c) deduction allowed for an S corporation?
The IRC 搂965(c) deduction is allowed for an S corporation in accordance with N.J.S.A 54A:5-10.
How is income under IRC 搂965 reported by an individual who has ownership in a C corporation?
Dividends are an enumerated category of income and are defined by N.J.S.A. 54A:5-1 (f).聽 Therefore, they are reportable and taxable in the same period that the deemed distribution is reported for federal income tax purposes.
Under N.J.S.A.54A:8-3 (c): “A taxpayer’s accounting method under this act shall be the same as their accounting method for Federal income tax purposes鈥”聽 A taxpayer’s method of accounting for federal income tax purposes determines not only the method used to compute income, but it also determines when the income should be recognized and reported. Therefore, taxpayers will recognize and report income in the same period as they do for federal income tax purposes.
Shareholders should report this income as Dividends on the Sexy真人-1040.
How is income under IRC 搂951A (GILTI) reported for New Jersey Gross Income Tax purposes?
In accordance with both the final federal regulations and IRS Notice 2019-46, taxpayers (including partners in a partnership and shareholders of an S corporation), should report GILTI for New Jersey Gross Income Tax purposes when the income is actually distributed from earnings and profits as Dividend Income.
Under the revised federal regulations GILTI no longer meets the "S Corporation Income" definition under N.J.S.A. 54A: 5-10 and therefore GILTI is not required to be included in the income of New Jersey S corporation shareholders. Taxpayers may amend their returns if this change affects their situation.
Taxpayers are responsible for keeping track of differences in their federal and New Jersey basis, so that the proper New Jersey gain or loss from the disposition of foreign stock is reported.
Does the New Jersey Gross Income Tax conform to the business interest expense limitations for partnership tax returns in accordance with IRC 搂163(j)?
鈥溾or federal purposes, the business interest expense disallowed as a deduction under IRC 搂163(j) is carried forward to the next taxable year as a disallowed business interest expense carryforward. The disallowed business interest expense carryforward may be limited in the next taxable year if the section 163(j) limitation continues to apply.
For New Jersey Gross Income Tax purposes, New Jersey does not conform to the business interest expense limitation for partnership tax returns in accordance with IRC 搂163(j). The New Jersey Gross Income Tax Act also does not have any carryforward or carryback provisions. The partnership can deduct 100% of the interest expense within the taxable year on indebtedness. The partnership can deduct the amount disallowed for federal purposes as an 鈥渙ther subtraction鈥 on its Sexy真人-1065 return.
In the year that the partnership uses the carried forward deduction amount for federal purposes, the partnership must add back that amount as an 鈥渙ther addition鈥 on its Sexy真人-1065 return. This addition is necessary since the partnership previously deducted 100% of the interest expense for New Jersey purposes, and the deduction cannot be taken twice鈥︹