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NEW JERSEY ENACTS SIGNIFICANT TAX LAW CHANGES
Robert S. Schwartz, Esq.
Governor Murphy and the New Jersey Legislature worked together this year to enact significant tax legislation. One aspect creates a property tax relief tax program for senior citizens via the Gross Income Tax Act (“GIT Act”). One aspect makes numerous changes to the Corporation Business Tax Act (“CBT Act”). In the mix, the legislation changes a few tax computational rules of importance to unincorporated businesses, as well as to S corporations that like unincorporated businesses do not pay the CBT income tax. We highlight the more significant changes below.
GIT Legislation
The GIT legislation establishes a “Stay NJ property tax credit”. Before describing the tax relief, we must let you know that this legislation is academic until the 2026 tax year. Of course, all New Jersey senior citizens are individually free to decide whether the legislation will, in fact, come to fruition for 2026 and later or be aborted for such reasons as the ordinarily recurring New Jersey state budget crises.
Anyway, in general, New Jersey principal residence owners during 2025, who are 65 and older in 2026 and who reported gross income on their New Jersey Form 1040 of less than $500,000 for 2025, can file in 2026 a special tax form claiming money back from New Jersey equal to 50% of the property taxes paid in 2025, but not exceeding $6,500. Thereafter, any annual money back will continue to be based on the prior year’s gross income and property tax paid.
Interestingly, the $6,500 cap will be increased according to a calculation done by the Division of Local Government Services reflecting the annual percentage increase in the average New Jersey residential property tax bill compared to the prior base year. The $500,000 gross income cap refers to a NJ 1040 filer’s “top line” gross income not reduced by personal exemptions and deductions and credits.
We read the legislation as actually not providing for a credit against GIT tax due for the prior year, but providing for money back even if the GIT due and paid is less than the 50% / $6500 limitations. So the legislature’s choice of “tax credit” is a misnomer.
Meanwhile, the legislation leaves in place New Jersey Homestead Property Tax Reimbursement and ANCHOR property tax rebate programs for qualifying taxpayers. For 2026 and thereafter the qualifying homeowner is only entitled to the greater of the dollar value of the Stay NJ amount or the combined amount of the Homestead Property Tax Reimbursement program, plus the ANCHOR property tax rebate, if applicable. In contradistinction to Governor Murphy and legislature reducing the New Jersey GIT graduated tax brackets for families reporting top line income of $500,000 or less per annum, no one can say that they have not created a more complex tax system.
CBT Legislation
The significant changes to the CBT tax and the in mix are as follows.
First, for CBT income tax taxpayers the top income tax bracket is going to be reduced from 11.5% to 9% for corporate taxable years beginning on and after January 1, 2024. Since taxable years beginning on and after January 1, 2018, the top bracket has been 11.5% of corporate “entire net income” of $1,000,000 or more allocated to New Jersey under income sourcing rules. Consequently, for next year, once a taxable corporation’s entire net income allocable to New Jersey reaches $100,000 the tax rate will be a flat 9%. New Jersey’s corporate tax rate is reverting to a rate the same or approximately that had been in effect for decades before the big 2018 rate increase.
Second, numerous technical changes are made to the rules affecting the computation of entire net income allocable to New Jersey with a cumulative effect that is going to increase or decrease corporate taxes paid from prior levels depending on the company, all other factors being equal, and, of course, aside from the next year’s 2.5% rate decrease. The rules are so technical the legislation contains five effective dates, depending on the change. Significant input from the New Jersey CBT tax lobby is thus reflected in the substantive changes.
The legislation is an overall improvement in the CBT tax system for corporate tax years ending on and after July 31, 2019, which was the start of New Jersey’s monumental change from corporation-by-corporation CBT tax determinations to a system whereby all affiliated corporations and other entities that are engaged in similar lines of business combine their results of operations (either within the United States or on a world-wide basis at the taxpayer’s election), followed by the allocation of the combined group’s entire net income to sources in and out of New Jersey. The legislation is not intended as a New Jersey revenue raising effort.
Third, effective for tax years beginning on and after January 1, 2023, smaller businesses operating as sole proprietorships, partnerships, limited liability companies or S corporations must begin to allocate their net taxable incomes according to the same source of income rules used by corporate taxpayers under the CBT in more recent years. To simplify: income allocation is based upon where the paying customer is located for the goods or services provided to the customer, in contradistinction to a three factor combination allocation formula. That formula basically consisted of gross receipts from customers located in New Jersey compared to gross receipts from customers everywhere, the number of employees located in New Jersey compared to all employees everywhere, and the value of personal and real property (whether owned or leased) located in New Jersey compared to such property located everywhere.
Less likely to impact most smaller businesses, but worth your knowing if you are connected in any way with the New Jersey business not paying the CBT, another change is that the concept of income other than from ordinary business operations or “non-operational” income is specifically assigned to the business location for activities that produced the “non-operational” income. All large corporations have considerable assets, often in the form of fixed income and equity investments that are held for cash flow or business investment purposes in the foreseeable future. Income realized from that source is often a significant part of a corporation’s annual income and can be regarded under New Jersey tax law as “non-operational”.
This writing is not and should not be interpreted as the rendering of legal advice or performance of legal services to any person by Herold Law, P.A. In accordance with professional ethical rules, furthermore, Herold Law, P.A., renders legal advice and performs legal services only in the context of an attorney-client relationship entered into before rendering advice or performing services.
