New Jersey Division of Taxation Issues Clarification over IRC Section 163(j) Conformity
The Tax Cuts and Jobs Act (TCJA), signed into law in late 2017, provided sweeping changes to the income tax code. One of those changes was the addition of Internal Revenue Code (IRC) Section 163(j), which introduced a new limitation on the amount of interest expense that corporations could deduct on their federal tax return. The rule went into effect for fiscal years beginning after December 31, 2017. The legislation prevents any corporation—or group of corporations filing a consolidated return—from deducting interest expense that amounts to greater than 30 percent of the total adjusted taxable income for the year. Any interest expense paid in excess of that amount could be carried forward and deducted in successive years.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in March 2020 as a response to the COVID-19 pandemic. That legislation instituted a temporary increase in the maximum amount of interest expense available for corporations from 30 percent to 50 percent of taxable income. The increase is in effect for the 2019 and 2020 tax years. As a rolling conformity state, New Jersey conforms to all sections of the IRC apart from code sections the state legislature explicitly decouples from. As New Jersey has not passed any statutes or regulations indicating that it does not, New Jersey conforms to the business interest expense limitations from both the TCJA and the CARES Act.
The New Jersey Division of Taxation recently released a technical tax bulletin clarifying its conformity with IRC §163(j) and how it should be applied for purposes of the New Jersey corporation business tax (CBT). The bulletin first confirmed that New Jersey conforms to the CARES Act updates to IRC §163 and next clarified how the section should be applied for corporations operating in New Jersey for purposes of the CBT. Member corporations that file a combined New Jersey tax return will be treated as one taxpayer for purposes of the application of the interest expense limitation, even if they file on a separate basis for federal income tax purposes. Also, member corporations that file a consolidated federal income tax return will be treated as a single taxpayer for purposes of calculating the interest expense limitation even if they file separate New Jersey CBT returns (if the group of corporations is not unitary and has not made an affiliated group combined return election). In practice, these rules indicate that taxpayers should adjust federal taxable income to apply the interest expense limitation at the group level on their New Jersey return.
The bulletin is most likely a response to uncertainty regarding how the interest expense limitation should be applied for affiliated groups of corporations. New Jersey intends to prevent affiliated corporations from each deducting interest expense that in total could eclipse the maximum allowed by the CARES Act, regardless of the method in which they file.
Taxpayers subject to the New Jersey business tax should examine the potential limitation of their interest expense.
For additional guidance on New Jersey corporation income tax law, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.