On June 6, 2016, legislation (S.B. 982) was reintroduced to the New Jersey Senate, which would require members of unitary business groups to file combined New Jersey corporation tax reports. The original bill was introduced in February 2016 but was subsequently withdrawn.
The stated reasoning behind this bill is that the unitary method is designed to improve tax “fairness” by eliminating the use of intercorporate transactions to shelter income from taxation. Under this proposed legislation, a combined group (defined as a group of corporations that are engaged in a unitary business) must file one combined return for the entire group. After computing the total income for the entire group, the allocation factor for the group takes into account both the entities that have nexus in New Jersey and those that do not. Sales sourced to New Jersey from the nontaxable entities are then allocated to those that are taxable (a “Finnigan” adjustment) while the denominator is that of the group.
In addition, the managerial member (common parent or entity selected by the group) may make an election to keep the group on a “water’s edge” basis. The election needs to be made on a timely filed original return. If such election is made, it is binding for the privilege period for which it is made and the next ten succeeding periods. The legislation excludes “80/20” companies (those with 80% or more of its sales assigned outside the United States) from the water’s edge group.
If passed, the new legislation would take effect immediately and apply to privilege periods ending after the date of enactment. We are available to assist in reviewing how this proposed legislation may impact business activities in New Jersey.
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