The federal Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, includes a one-time repatriation transition tax on earnings and profits accumulated abroad.
The law requires a specified foreign corporation (as defined in the Internal Revenue Code (IRC)) that has accumulated post-1986 deferred foreign income to report such income as a deemed repatriation dividend, which will be taxed to the recipient at a reduced effective federal tax rate. Regardless of whether the earnings and profits are brought back, the repatriation transition tax is imposed on the deemed repatriation dividends for the last tax year beginning before January 1, 2018.
For New Jersey Corporation Business Tax purposes, the deemed repatriation dividends will be excluded from entire net income, to the extent provided in the Corporation Business Tax Act (N.J.S.A. 54:10A-4(k) (5)). If a corporation does not meet the ownership thresholds, the deemed repatriation dividends will be included in entire net income to the extent provided in the Act. Recently signed legislation in New Jersey (P.L. 2018, c. 48, and P.L. 2018, c. 131) made several changes to the Corporation Business Tax Act that are retroactive to tax years beginning on and after January 1, 2017. New Jersey has decoupled from the deduction and exemptions permitted under the federal Tax Cuts and Jobs Act, Public Law 115-97 (IRC § 965). The legislation reduces the 100% dividend exclusion to 95% for certain taxpayers. However, the law now permits an exclusion of dividends by a taxpayer if the taxpayer’s subsidiary received those same dividends from other lower-tiered subsidiaries that filed and paid tax to New Jersey in the same tax year. In addition, a special allocation was created to provide factor relief. Taxpayers can use a special allocation formula that is the lesser of the three-year average 2014 through 2016 allocation factor or 3.5% for calculating the tax on dividends and deemed dividends received by a taxpayer from a subsidiary for tax years beginning on and after January 1, 2017, and beginning before January 1, 2019. In lieu of filing an amended 2017 Form CBT-100 or Form BFC-1, taxpayers affected by these changes can file Form CBT-DIV 2017.
For New Jersey Gross Income Tax purposes, dividends are an enumerated category of income. Thus, deemed repatriation dividends reported under IRC Section 965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes.