What Are the New Jersey Combined Reporting Rules?

New Jersey implemented a shift in its corporate taxation framework by adopting mandatory combined reporting for businesses. This change applies to corporate tax years ending on or after July 31, 2019, altering how multi-entity corporations calculate their Corporate Business Tax (CBT). The objective of combined reporting is to treat a group of related corporations as a single taxpayer. This approach is designed to more accurately reflect the income a business earns from its activities within the state and prevent artificial income shifting to lower-tax jurisdictions.

Defining the New Jersey Combined Group

A combined group is composed of all companies that have common ownership and are engaged in a unitary business, provided at least one company is subject to New Jersey’s CBT. Common ownership is established when more than 50% of the voting control of each member is directly or indirectly held by a common owner or group of owners. This ownership test is the initial step in determining the members of the group.

The core of the combined group definition is the concept of a unitary business. A business is considered unitary if the affiliated entities are so interconnected that they function as a single economic enterprise, resulting in a flow of value among the members. This determination involves examining factors that demonstrate interdependencies, such as centralized management, functional integration, and economies of scale. When a parent holding company controls subsidiaries engaged in a unitary business, it is also deemed part of that unitary business.

New Jersey law specifies which types of entities are included in or excluded from a combined group. Includable entities encompass U.S. corporations and banking corporations. Conversely, entities such as insurance companies, Real Estate Investment Trusts (REITs), and Regulated Investment Companies (RICs) are excluded and continue to file on a separate basis. New Jersey S corporations are also excluded by default but can elect to be included in the group.

A decision for a combined group is whether to make a water’s-edge election. The default filing method is worldwide, which includes the income and apportionment factors of all unitary group members, regardless of where they are incorporated. The water’s-edge election allows the group to limit its combined report to U.S.-based corporations, which can be advantageous for multinational corporations. The election is binding for five years and is made by the group’s designated managerial member on the first combined return.

The combined group must appoint a “managerial member” to act as its agent for all New Jersey tax matters. If the common parent corporation of the group has a taxable presence, or nexus, in New Jersey, it is required to be the managerial member. The managerial member must register with the state and obtain a new identification number for combined reporting purposes.

Calculating Combined Group Income and the Apportionment Factor

The process of calculating the combined group’s tax base begins with determining the income of each member. Each entity in the group calculates its entire net income as if it were filing a separate return, following New Jersey CBT rules. These individual income amounts are then added together to arrive at the total income of the combined group before any state-specific adjustments or apportionment.

A step in this calculation is the elimination of intercompany transactions. When affiliated corporations within the combined group conduct business with each other, these transactions must be removed from the combined income calculation. This prevents the same income from being counted twice or expenses from being improperly deducted, ensuring the return reflects only income from transactions with entities outside the group.

Once the total combined income is determined, it must be apportioned to New Jersey to identify the share of income subject to the state’s tax. New Jersey utilizes a single sales factor apportionment formula. The formula is a fraction where the numerator is the group’s total receipts from New Jersey sources and the denominator is the group’s total receipts from all sources.

For tax years ending on or after July 31, 2023, New Jersey mandates the use of the “Finnigan rule” for calculating the sales factor numerator. Under this rule, the numerator includes sales of goods or services delivered to New Jersey customers by any member of the unitary group, regardless of whether that specific member has nexus in the state. This approach treats the group as a single taxpayer for apportionment, so if one member has nexus, the in-state sales of all members are captured in the apportionment factor.

Treatment of Net Operating Losses and Tax Credits

The application of net operating losses (NOLs) under combined reporting depends on when the losses were generated. Losses incurred in tax periods ending before July 31, 2019, are treated as Prior Net Operating Loss Conversion Carryovers (PNOLCCs). Initially, these pre-combination losses could not be shared and could only be used to offset the apportioned income of the specific corporation that generated the loss. For tax periods ending on or after July 31, 2023, these PNOLCCs from different members can be pooled to offset the combined income of the entire group.

NOLs generated in tax years ending on or after July 31, 2019, are calculated on a post-apportionment, combined group basis. These group NOLs can be carried forward to offset the combined apportioned income of the entire group in future years. The managerial member is responsible for tracking the generation and utilization of these shared losses for the group.

Tax credits are earned by a specific taxable member of the group based on its individual activities, such as research and development. Once earned, these credits can often be shared among the taxable members of the combined group. This allows a credit generated by one member to be applied against the tax liability of another member within the same group.

The decision to share a credit rests with the member that generated it. This sharing mechanism is beneficial when one member generates more credits than it can use, while another member has a tax liability. The ability to apply credits across the group can help lower the overall combined tax burden, and this sharing is permitted even if the members were not part of the same combined group in the year the credit was originally generated.

Filing Requirements and Compliance

The designated managerial member is responsible for submitting the single return for the entire group, which is the Form CBT-100U, the New Jersey Corporation Business Tax-Unitary General Return. This form consolidates the financial information and tax calculations for all members of the combined group.

Several supporting schedules must be filed with the CBT-100U to provide detailed information. A schedule is required to list all members of the combined group, and another, Schedule U-NOL, is used to track the utilization of both shared group NOLs and individual PNOLCCs. These schedules provide the Division of Taxation with the necessary data to verify the return.

New Jersey mandates that all combined returns be filed electronically. After the return is filed, the managerial member is also responsible for remitting the total tax payment due for the group, including any required minimum tax for members with nexus in the state.

The combined group must make quarterly estimated tax payments throughout the year based on its anticipated total tax liability. The managerial member is responsible for calculating and paying these estimates for the group, consolidating the payment obligations of numerous individual entities.