While much attention has been paid to the sunsetting of the Corporation Business Tax in Gov. Phil Murphy’s budget for FY24, there is another big positive likely on the way.
NJBIA-supported legislation, as part of the budget, was introduced this week to bring much-needed reform to how New Jersey taxes income earned abroad by U.S.-controlled foreign corporations – a category of taxes called global intangible low-taxed income, or GILTI.
GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act and can lead to very high tax burdens on foreign profits, which puts U.S. companies that operate abroad at a disadvantage.
“This is something that NJBIA has been working toward for the past few years now and we are thankful to the Governor’s office, Treasury and the sponsors who have worked with us on it,” said NJBIA Chief Government Affairs Officer Christopher Emigholz.
“It is admittedly a fairly wonky policy that is being remedied with this legislation. However, it is worth paying attention to because it will make New Jersey more competitive for certain multi–national corporations, which will greatly benefit our economy and job creation. To be sure, we certainly shouldn’t be feeling ‘guilty’ about it.”
New Jersey is one of 20 states to tax GILTI at all and is one of only 12 states overall that continues to only exclude 50% of GILTI.
Bills S-3737 (Sarlo, D-36) and A-5323 (Pintor Marin, D-29) would make several technical changes to New Jersey’s tax code – most notably excluding 95% of GILTI.
In 2019, as an example, neighboring New York did the same, providing a 95% exemption from its corporate income tax base for any GILTI amounts recognized for federal tax purposes.
“If we’re going to be one of the minority of states taxing GILTI, we should at least improve upon our negative outlier status,” Emigholz said. “We should be following the lead of states like New York, Connecticut, Massachusetts, Vermont and Tennessee, which have a 95% GILTI exclusion rule.
“When we’re such an outlier on this type of income, it makes it much less affordable for a multi–national corporation to expand their business in New Jersey – and that’s what we want to avoid.”
Emigholz said the legislation also makes New Jersey more competitive regarding the tax treatment of net operating losses (NOLs).
Previous treatment of NOLs had put New Jersey in line with most states in the country, until a law signed by Gov. Murphy in 2018 made the Garden State a negative outlier in that category.
“NOLs are important because those small- and medium-sized startup companies that we want to see here in New Jersey often don’t turn a profit in their early years – and they’re penalized for it,” Emigholz said.
“By returning us to a more competitive treatment of NOLs by changing their deduction ordering and allowing their pooling, it’s a better check of the box for companies in the technology, life sciences and manufacturing sectors. It’s better for venture capital in the state. And it’s better for our overall competitiveness.”