The New Jersey Division of Taxation issued a notice on November 5th solving the “trapped dividend exclusion” issue faced by many taxpayers as they prepared to file their first New Jersey combined Corporate Business Tax (CBT) returns for the 2019 year. The issue arose due to New Jersey’s adoption of combined reporting and its proposed method for calculating the dividend received exclusion. Specifically, a combined group that includes a member with a zero allocation factor would not be able to utilize that member’s dividend exclusion.
The Division issued its notice one day after Governor Murphy’s approval of a technical corrections bill, Assembly 4809, which among other things, amended the definition of “taxpayer” to include “any combined group filing a mandatory or elective New Jersey combined return.”
Pursuant to the notice, taxpayers are instructed to compute the exclusion for dividends received – which is limited to 95% or 50% (depending on ownership percentage of the distributee) of the dividend amount – as though it were a “group level exclusion.” Because the New Jersey 2019 combined return (Form CBT-100U) requires computation of the dividend exclusion on a separate company basis, the notice explains the adjustments that must be made on Schedule R:
[E]ach member must enter the total dividends and deemed dividends reported, and not eliminated on Schedule A, of all the members of the combined group. Each member will compute the dividend exclusion as though it were a group level exclusion in each member’s column. Each member of the group will continue to use their respective allocation factor from Schedule J.
As a result of this change, the dividend exclusion will not be “trapped” with a member that has a zero allocation factor, such as an out-of-state holding company with no New Jersey receipts. The member with the zero allocation factor will have no income allocated to New Jersey and no dividend exclusion to be trapped. Instead, the exclusion is spread among the other members of the group.
Eversheds Sutherland Observation: Taxpayers should note that the 2019 CBT return instructions provide a separate 100% dividend exclusion for previously taxed dividends on Schedule PT. According to Schedule PT instructions:
Schedule PT was created to allow [a] taxpayer[ ] an additional exclusion if the taxpayer provides documentation substantiating that the taxpayer[ ] already included those dividends in entire net income and paid tax to New Jersey.
A taxpayer is only allowed this exclusion if the taxpayer filed a corporation business tax return in the previous year(s), the taxpayer had included the dividend in their entire net income and paid tax to New Jersey. If those dividends reduced the taxpayer’s Net Operating Losses/Net Operating Loss Carryovers, a rider must be attached that details the amounts. The additional exclusion is only for the amount of dividends actually included in entire net income and is not allowed if the dividends had previously been excluded.
Because the maximum dividend exclusion provided on Schedule R is 95%, a taxpayer eligible to claim a 100% dividend exclusion on Schedule PT will have less dividend income subject to tax than a taxpayer claiming a dividend exclusion on Schedule R.
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