ASSEMBLY, No. 3535

STATE OF NEW JERSEY

214th LEGISLATURE

 

INTRODUCED DECEMBER 6, 2010

 


 

Sponsored by:

Assemblyman  LOUIS D. GREENWALD

District 6 (Camden)

Assemblyman  PETER J. BARNES, III

District 18 (Middlesex)

Assemblyman  GORDON M. JOHNSON

District 37 (Bergen)

Assemblywoman  NELLIE POU

District 35 (Bergen and Passaic)

Assemblywoman  ALISON LITTELL MCHOSE

District 24 (Sussex, Hunterdon and Morris)

Assemblyman  JAY WEBBER

District 26 (Morris and Passaic)

Assemblyman  PAUL D. MORIARTY

District 4 (Camden and Gloucester)

 

Co-Sponsored by:

Assemblymen Diegnan, Fuentes, Caputo, Schaer, Coutinho, Assemblywoman Riley, Assemblymen Chivukula, Giblin, Burzichelli, Assemblywomen Quigley, Lampitt, Assemblymen Conners, O'Scanlon and Chiusano

 

 

 

 

SYNOPSIS

     Consolidates certain business-related categories of gross income and provides 20 year carryforward of certain net losses under gross income tax.

 

CURRENT VERSION OF TEXT

     As introduced.

  


An Act consolidating certain business-related categories of gross income and providing for the carryforward of certain net losses under the gross income tax, amending P.L.2001, c.93, N.J.S.54A:5-1, N.J.S.54A:5-2, and P.L.1977, c.273.

 

     Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

     1.    Section 7 of P.L.2001, c.93 (C.44:10-92) is amended to read as follows:

     7.    a.  Moneys deposited into or withdrawn from an individual development account by an account holder pursuant to subsection c. of section 5 of this act or matched by a community-based organization pursuant to paragraph (7) of subsection e. of section 5 of this act shall not be considered gross income otherwise includable as income pursuant to subsections [a., b., k., and p. of N.J.S.54A:5-1] a. and q. of N.J.S.54A:5-1.

     b.    Interest earned by an individual development account shall not be considered gross income otherwise includable as income pursuant to subsection e. of N.J.S.54A:5-1.

     c.     Moneys deposited in an individual development account and the interest from an individual development account under this act shall not be taken into account in determining eligibility or the amount of assistance under State and federal means-tested programs pursuant to 42 U.S.C s.604 (h) and 45 C.F.R. s.263.20.

(cf: P.L.2001, c.93, c.7)

 

     2.    N.J.S.54A:5-1 is amended to read as follows:

     54A:5-1. New Jersey Gross Income Defined.  New Jersey gross income shall consist of the following categories of income:

     a.     Salaries, wages, tips, fees, commissions, bonuses, and other remuneration received for services rendered whether in cash or in property, and amounts paid or distributed, or deemed paid or distributed, out of a medical savings account that are not excluded from gross income pursuant to section 5 of P.L.1997, c.414 (C.54A:6-27).

     b.    [Net profits from business.  The net income from the operation of a business, profession or other activity after provision for all costs and expenses incurred in the conduct thereof, determined either on a cash or accrual basis in accordance with the method of accounting allowed for federal income tax purposes but without deduction of the amount of:

     (1)   taxes based on income;

     (2)   a civil, civil administrative, or criminal penalty or fine,
including a penalty or fine under an administrative consent order, assessed and collected for a violation of a State or federal environmental law, an administrative consent order, or an environmental ordinance or resolution of a local governmental entity, and any interest earned on the penalty or fine, and any economic benefits having accrued to the violator as a result of a violation, which benefits are assessed and recovered in a civil, civil administrative, or criminal action, or pursuant to an administrative consent order.  The provisions of this paragraph shall not apply to a penalty or fine assessed or collected for a violation of a State or federal environmental law, or local environmental ordinance or resolution, if the penalty or fine was for a violation that resulted from fire, riot, sabotage, flood, storm event, natural cause, or other act of God beyond the reasonable control of the violator, or caused by an act or omission of a person who was outside the reasonable control of the violator; and

     (3)   treble damages paid to the Department of Environmental Protection pursuant to subsection a. of section 7 of P.L.1976, c.141 (C.58:10-23.11f) for costs incurred by the department in removing, or arranging for the removal of, an unauthorized discharge upon the failure of the discharger to comply with a directive from the department to remove, or arrange for the removal of, a discharge] (Deleted by amendment, P.L.    , c.   ) (pending before the Legislature as this bill).

     c.     Net gains or income from disposition of property.  Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property, including real or personal, whether tangible or intangible as determined in accordance with the method of accounting allowed for federal income tax purposes.  For the purpose of determining gain or loss, the basis of property shall be the adjusted basis used for federal income tax purposes, except as expressly provided for under this act, but without a deduction for penalties, fines, or economic benefits excepted pursuant to paragraph (2), or for treble damages excepted pursuant to paragraph (3) of subsection b. of this section.

     A taxpayer's net gain or loss on the sale, exchange or other disposition of a share of an S corporation shall be calculated by increasing the adjusted basis of the share by an amount equal to the shareholder's net losses and deductions in respect of the share allowed and deducted from income for federal income tax purposes, not including any personal net operating loss deductions, to the extent that such net losses were not offset by the taxpayer's pro rata share of S corporation income otherwise subject to taxation pursuant to subsection p. of this section in respect of another S corporation, subject to rules of priority and assignment determined by the director.

     For the tax year 1976, any taxpayer with a tax liability under this subsection, or under the "Tax on Capital Gains and Other Unearned Income Act," P.L.1975, c.172 (C.54:8B-1 et seq.), shall not be subject to payment of an amount greater than the amount he would have paid if either return had covered all capital transactions during the full tax year 1976; provided, however, that the rate which shall apply to any capital gain shall be that in effect on the date of the transaction.  To the extent that any loss is used to offset any gain under P.L.1975, c.172, it shall not be used to offset any gain under the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq.

     The term "net gains or income" shall not include gains or income derived from obligations which are referred to in clause (1) or (2) of N.J.S.54A:6-14 of this act or from securities which evidence ownership in a qualified investment fund as defined in section 2 of P.L.1987, c.310 (C.54A:6-14.1). The term "net gains or net income" shall not include gains or income from transactions to the extent to which nonrecognition is allowed for federal income tax purposes.  The term "sale, exchange or other disposition" shall not include the exchange of stock or securities in a corporation a party to a reorganization in pursuance of a plan of reorganization, solely for stock or securities in such corporation or in another corporation a party to the reorganization and the transfer of property to a corporation by one or more persons solely in exchange for stock or securities in such corporation if immediately after the exchange such person or persons are in control of the corporation.  For purposes of this clause, stock or securities issued for services shall not be considered as issued in return for property.

     For purposes of this clause, the term "reorganization" means--

     (i)    A statutory merger or consolidation;

     (ii)   The acquisition by one corporation, in exchange solely for all or part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation) of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);

     (iii) The acquisition by one corporation, in exchange solely for all or part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded;

     (iv)  A transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred;

     (v)   A recapitalization;

     (vi)  A mere change in identity, form, or place of organization however effected; or

     (vii) The acquisition by one corporation, in exchange for stock of a corporation (referred to in this subclause as "controlling corporation") which is in control of the acquiring corporation, of substantially all of the properties of another corporation which in the transaction is merged into the acquiring corporation shall not disqualify a transaction under subclause (i) if such transaction would have qualified under subclause (i) if the merger had been into the controlling corporation, and no stock of the acquiring corporation is used in the transaction;

     (viii) A transaction otherwise qualifying under subclause (i) shall not be disqualified by reason of the fact that stock of a corporation (referred to in this subclause as the "controlling corporation") which before the merger was in control of the merged corporation is used in the transaction, if after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation.

     For purposes of this clause, the term "control" means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

     For purposes of this clause, the term "a party to a reorganization" includes a corporation resulting from a reorganization, and both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.  In the case of a reorganization qualifying under subclause (i) by reason of subclause (vii) the term "a party to a reorganization" includes the controlling corporation referred to in such subclause (vii).

     Notwithstanding any provisions hereof, upon every such exchange or conversion, the taxpayer's basis for the stock or securities received shall be the same as the taxpayer's actual or attributed basis for the stock, securities or property surrendered in exchange therefor.

     d.    [Net gains or net income derived from or in the form of rents, royalties, patents, and copyrights] (Deleted by amendment, P.L.    , c.   ) (pending before the Legislature as this bill).

     e.     Interest, except interest referred to in clause (1) or (2) of N.J.S.54A:6-14, or distributions paid by a qualified investment fund as defined in section 2 of P.L.1987, c.310 (C.54A:6-14.1), to the extent provided in that section.

     f.     Dividends.  "Dividends" means any distribution in cash or property made by a corporation, association or business trust that is not an S corporation, (1) out of accumulated earnings and profits, or (2) out of earnings and profits of the year in which such dividend is paid and any distribution in cash or property made by an S corporation, as specifically determined pursuant to section 16 of P.L.1993, c.173 (C.54A:5-14).

     The term "dividends" shall not include distributions paid by a qualified investment fund as defined in section 2 of P.L.1987, c.310 (C.54A:6-14.1), to the extent provided in that section.

     g.     Gambling winnings.

     h.     Net gains or income derived through estates or trusts.

     i.      Income in respect of a decedent.

     j.     Amounts distributed or withdrawn from an employee trust attributable to contributions to the trust which were excluded from gross income under the provisions of chapter 6 of Title 54A of the New Jersey Statutes, amounts rolled over from an IRA, as defined pursuant to subsection (a) of section 408 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.408, that is not a Roth IRA, as defined pursuant to subsection b. of section 2 of P.L.1998,c.57 (C.54A:6-28) to an IRA that is a Roth IRA, and pensions and annuities except to the extent of exclusions in N.J.S.54A:6-10 hereunder, notwithstanding the provisions of N.J.S.18A:66-51, P.L.1973, c.140, s.41 (C.43:6A-41), P.L.1954, c.84, s.53 (C.43:15A-53), P.L.1944, c.255, s.17 (C.43:16A-17), P.L.1965, c.89, s.45 (C.53:5A-45), R.S.43:10-14, P.L.1943, c.160, s.22 (C.43:10-18.22), P.L.1948, c.310, s.22 (C.43:10-18.71), P.L.1954, c.218, s.32 (C.43:13-22.34), P.L.1964, c.275, s.11 (C.43:13-22.60), R.S.43:10-57, P.L.1938, c.330, s.13 (C.43:10-105), R.S.43:13-44, and P.L.1943, c.189, s.5 (C.43:13-37.5).

     k.    [Distributive share of partnership income] (Deleted by amendment, P.L.    , c.   ) (pending before the Legislature as this bill).

     l.      Amounts received as prizes and awards, except as provided in N.J.S.54A:6-8 and N.J.S.54A:6-11 hereunder.

     m.    Rental value of a residence furnished by an employer or a rental allowance paid by an employer to provide a home.

     n.     Alimony and separate maintenance payments to the extent that such payments are required to be made under a decree of divorce or separate maintenance but not including payments for support of minor children.

     o.    Income, gain or profit derived from acts or omissions defined as crimes or offenses under the laws of this State or any other jurisdiction.

     p.    [Net pro rata share of S corporation income] (Deleted by amendment, P.L.    , c.   ) (pending before the Legislature as this bill).

     q.    Net business income.  The excess of any net gain or net income derived from or in the form of:  (1) the operation of a business, profession or other activity; (2) rents, royalties, patents, and copyrights; (3) the distributive share of partnership income; and (4) pro rata share of S corporation income, less all costs and expenses and any net loss incurred in or derived from:  (1) the conduct of a business, profession or other activity; (2) rents, royalties, patents, and copyrights; (3) the distributive share of partnership income; and (4) pro rata share of S corporation income. 

     For purposes of determining net business income, the net income from, and all costs and expenses incurred in, the operation or the conduct of a “business, profession or other activity” shall be determined either on a cash or accrual basis in accordance with the method of accounting allowed for federal income tax purposes but without deduction of the amount of:

     (1)   taxes based on income;

     (2)   a civil, civil administrative, or criminal penalty or fine, including a penalty or fine under an administrative consent order, assessed and collected for a violation of a State or federal environmental law, an administrative consent order, or an environmental ordinance or resolution of a local governmental entity, and any interest earned on the penalty or fine, and any economic benefits having accrued to the violator as a result of a violation, which benefits are assessed and recovered in a civil, civil administrative, or criminal action, or pursuant to an administrative consent order.  The provisions of this paragraph shall not apply to a penalty or fine assessed or collected for a violation of a State or federal environmental law, or local environmental ordinance or resolution, if the penalty or fine was for a violation that resulted from fire, riot, sabotage, flood, storm event, natural cause, or other act of God beyond the reasonable control of the violator, or caused by an act or omission of a person who was outside the reasonable control of the violator; and

     (3)   treble damages paid to the Department of Environmental Protection pursuant to subsection a. of section 7 of P.L.1976, c.141 (C.58:10-23.11f) for costs incurred by the department in removing, or arranging for the removal of, an unauthorized discharge upon the failure of the discharger to comply with a directive from the department to remove, or arrange for the removal of, a discharge.    

(cf:  P.L.1998, c.57, s.1)

 

     3.    N.J.S.54A:5-2 is amended to read as follows:

     54A:5-2.  Losses.  Losses which occur within one category of gross income may be applied against other sources of gross income within the same category of gross income during the taxable year, except that a net loss which occurs within subsection q. of N.J.S.54A:5-1 may be carried forward, in accordance with the terms and conditions as may be prescribed by the director, and applied against gross income in subsection q. of N.J.S.54A:5-1 during each of the 20 taxable years following the taxable year in which the net loss occurs.  However, a net loss in one category of gross income may not be applied against gross income in another category of gross income.

(cf:  P.L.1976, c.47. s.54A:5-2)

 

     4.    Section 3 of P.L.1977, c.273 (C.54A:6-15) is amended to read as follows:

     3.    Other retirement income. a. Gross income shall not include income:

     for taxable years beginning before January 1, 2000, of up to $10,000 for a married couple filing jointly, $5,000 for a married person filing separately, or $7,500 for an individual filing as a single taxpayer or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1;

     for the taxable year beginning on or after January 1, 2000, but before January 1, 2001, of up to $12,500 for a married couple filing jointly, $6,250 for a married person filing separately, or $9,375 for an individual filing as a single taxpayer or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1;

     for the taxable year beginning on or after January 1, 2001, but before January 1, 2002, of up to $15,000 for a married couple filing jointly, $7,500 for a married person filing separately, or $11,250 for an individual filing as a single taxpayer or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1;

     for the taxable year beginning on or after January 1, 2002, but before January 1, 2003, of up to $17,500 for a married couple filing jointly, $8,750 for a married person filing separately, or $13,125 for an individual filing as a single taxpayer or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1;

     for taxable years beginning on or after January 1, 2003, gross income shall not include income of up to $20,000 for a married couple filing jointly, $10,000 for a married person filing separately, or $15,000 for an individual filing as a single taxpayer or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1, when received in any tax year by a person aged 62 years or older who received no income in excess of $3,000 from one or more of the sources enumerated in subsections [a., b., k. and p. of N.J.S.54A:5-1] a. and q. of N.J.S.54A:5-1, but for taxable years beginning on or after January 1, 2005, only if the taxpayer has gross income for the taxable year of not more than $100,000, provided, however, that the total exclusion under this subsection and that allowable under N.J.S.54A:6-10 shall not exceed the amounts of the exclusions set forth in this subsection.

     b.    In addition to the exclusion provided under N.J.S.54A:6-10 and subsection a. of this section, gross income shall not include income of up to $6,000 for a married couple filing jointly or an individual determining tax pursuant to subsection a. of N.J.S.54A:2-1, or $3,000 for a single person or a married person filing separately, who is not covered under N.J.S.54A:6-2 or N.J.S.54A:6-3, but who would be eligible in any year to receive payments under either section if he or she were covered thereby.

(cf:  P.L.2005, c.130, s.2)

 

     5.    This act shall take effect immediately and apply to taxable years beginning on or after January 1, 2011.

 

 

STATEMENT

 

     This bill consolidates certain business-related categories of gross income, and provides for the carryforward of certain net losses for up to 20 years under the New Jersey gross income tax.

     Under the bill, four of the gross income tax’s 16 separately defined categories of income are consolidated into a single category of business-related income.  Specifically, the bill consolidates (1) net profits from business; (2) net gains or net income derived from or in the form of rents, royalties, patents, and copyrights; (3) distributive share of partnership income; and (4) net pro rata share of S corporation income into “net business income,” a separate free-standing category of income subject to the gross income tax.

     This new consolidated category of income is based on the same terms and definitions used to define the four categories slated for consolidation.  For purposes of the bill, net business income is the excess of any net gain or net income derived from or in the form of:  (1) the operation of a business, profession or other activity; (2) rents, royalties, patents, and copyrights; (3) distributive share of partnership income; and (4) pro rata share of S corporation income, less all costs and expenses and any net loss incurred in or derived from those same sources from which a net gain or income occurs during the taxable year.

     The consolidation provided by the bill permits taxpayers who generate different sources of income from different types of businesses to better offset gains derived from one business entity with losses sustained from another.  As a result of the bill, a taxpayer who generates a profit from a limited liability company may offset that gain with losses sustained as a sole proprietor, losses sustained from the sale of a patent or copyright, or losses sustained from an investment in a Subchapter S corporation during the year the loss occurs.

     Under current law, this movement or “cross-netting” of gains or losses from one category of income to another is prohibited.  A loss may be used to offset a gain only if that loss and that gain fall within the same category of income. 

     In addition, the bill provides for the carryforward of certain net losses under the gross income tax.  Specifically, the bill permits taxpayers whose business expenses outweigh business income derived from the new consolidated category, “net business income,” to carryforward and apply the remainder of their loss, the net loss, against income derived from the source of that net loss in each of the 20 taxable years following the year the net loss occurs.

     The net loss carryforward is intended to provide taxpayers greater flexibility in recovering business-related losses.  As a result of the bill, a taxpayer who sustains a net loss from the new consolidated category may elect, for up to 20 years, to carryforward that loss and offset any future tax liabilities that may be derived from “net business income.”

     Under current law, this movement or “carryforward” of losses from one year to the next is prohibited.  A loss which occurs in one taxable year may not be carried back or forward and applied against past or future tax liabilities.  

     The inability to carry net losses from one year to the next, along with the inability to cross-net gains or losses from one category of income to another, is a central tenet of the State’s approach to imposing tax on income.  New Jersey is one of two states that, unlike the federal government and states that base their income tax on the federal definition of taxable income, impose tax on “gross income.”

     Under this approach, New Jersey’s gross income tax has 16 separately defined categories of income.  Each of these categories is a separate total and for some, but not all, of the categories the costs and expenses of making that particular kind of income can be subtracted from that specific kind of income to calculate each of 16 small sums.

     New Jersey’s gross income is the total of those 16 sums, but the key difference between New Jersey taxable income and federal taxable income is that if for one of the 16 separate categories of income the “sum” is negative, or a loss, that loss is disregarded in calculating total New Jersey income.  In other words, a loss cannot be carried back or forward against past or future tax liabilities, and cannot be applied to any other category of income.

     When the gross income tax was enacted, this approach to imposing tax on income was aimed at simplification. The law set aside the complex deductions, exclusions, carryforwards, carrybacks, phaseouts, credits, and special allowances of the federal income tax, and required that 14 specific categories would be added up, a rate would be applied, and a calculation would be completed.

     Since then, new forms of structuring businesses have emerged, and more taxpayers have invested in more types of more diverse businesses entities.  What was simple and straightforward has become inflexible and has served as a deterrent for growth and development. In creating a consolidated category of business-related income and allowing taxpayers to carry forward net losses, this bill removes the deterrent, and allows New Jersey’s gross income tax to keep pace with changes in the current marketplace.