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NEW JERSEY BUSINESS TAX REFORM ACT andNEW JERSEY ESTATE TAX LAW CHANGES

Editor’s Note…Richard J. Flaster

This entire Tax and Business Report is devoted to summarizing the most material provisions of the New Jersey Business Tax Reform Actand the New Jersey Estate Tax changes of P.L. 2002, Chapter 31. The Tax Reform Act radically alters the Corporation Business Tax (“CBT”)and hence the current playing field for businesses with a New Jersey “nexus.” P.L. 2002, Chapter 31 materially and significantly alters the New Jersey Estate Tax and will now subject New Jersey estates which were previously exempt from taxation to new and significant state Estate Taxobligations. Both new laws create tax structures quite different from other states, and businesses and individuals will be well-advised to

promptly re-assess their current income tax and estate tax planning.If you provide us with your e-mail address and the e-mail addresses of colleagues who would be interested in receiving this Report,

we would be pleased to include that information in the data bank for this Report. Please send that information to me at [email protected].

Copyright © 2002 Tax & Business Report • Flaster/Greenberg P.C

www.flastergreenberg.com Summer 2002

TAX AND

BUSINESS

LAWREPORTA Newsletter from the Tax & Corporate Practice Group

TAX AND

BUSINESS

LAWREPORTA Newsletter from the Tax & Corporate Practice Group

Alan H. Zuckerman

Business Tax Reform ActAspect of Tax Prior Law New LawC Corp Tax Rates $0 - $100,000 income = 7% rate $0 - $50,000 income = 6.5% rate

$100,000 + income = 9% rate $50,000 - $100,000 income = 7.5% rate

Minimum tax = $210 $100,000 + income = 9% rateMinimum tax = $500 ($2,000 for affiliated corporations with payrolls greater than $5 million)

S Corp Tax Rates FYE after 7/1/02 but before 7/1/03: FYE before 7/1/06 = 1.33% rate$0 - $100,000 = $0 FYE after 6/30/06 but before 7/1/07 = .67% rateGreater than $100,000 = .6% FYE after 6/30/07 = $0 taxFYE after 7/1/03: $0 tax

Scope of Taxation Taxes all corporations with a “nexus” to NJ. Generally, taxes within constitutional limits all corporations which derive income from NJ sources or have “nexus”to NJ.

Richard J. Flaster Elaine J. Petruzziello Laura B. Wallenstein

S P E C I A L

E D I T I O N



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Tax & Business Report • Flaster/Greenberg P.C.

Aspect of Tax Prior Law New Law AMA (Alternative No provision. Corporations pay greater of the CBT or AMA. At theMinimum Assessment) corporation’s election (effective for five years), AMA is

calculated on the basis of either:(a) Gross Receipts:

(i) $0 - $2 million = $0 assessment(ii) $2 million - $20 million = .125% of gross

receipts above $2 million x 1.11111(iii) $20 million - $30 million = .175% of grossreceipts

(iv) $30 million - $50 million = .3% of gross receipts(v) $50 million - $75 million = .35% of gross receipts(vi) $75 million + = .4% of gross receipts; or

(b) Gross Profits:(i) $0 - $1 million = $0 assessment(ii) $1 million - $10 million = .25% of gross profits

above $1 million x 1.11111(iii) $10 million - $15 million = .35% of gross profits(iv) $15 million - $25 million = .6% of gross profits(v) $25 million - $37.5 million = .7% of gross profits(vi) $37.5 million + = .8% of gross profits

Cap: $5 million for single corporation and $20 millionfor affiliated group of 5 or more corporations.Sunset: Generally by 7/1/06 (unless earlier abolished by a 9 member commission on or before 12/31/04).Credit carryover for excess AMA over CBT but subjectto limit of 50% of carryover year CBTScope = Inapplicable to NJ S corporations and professionalservice corporations.

Investment Companies Limits taxable income to 25% of total income. Limits taxable income to 40% of total income.

Dividends Received 100% of dividends received from 80% - owned Eliminates exclusion for dividends received from companiesExclusion companies are excludable and 50% of dividends owned less than 50%.

received from other companies are excludable.

Depreciation Generally followed Federal tax law. Disallows the 30% “bonus depreciation” provided by 2002 Federal tax law.

Operational Income Income allocation by three component Sales taxed in no other jurisdiction are eliminated from Allocation formula based on fractions of NJ sales, payroll sales fraction denominator (the so-called “throw-out rule”

and assets. Sales fraction includes receipts for “nowhere sales”). Sales fraction includes all receiptsderived from financial services only if services derived from financial services to NJ customers irrespectiveperformed in NJ. of situs of service performance.

Deductions for Foreign Allowed. Eliminated.Tax Payments

Non-Operational Income Specifically assigned to the taxing jurisdiction All Non-Operational Income is assigned to NJ if principal(e.g., rent, royalties, of origin. office of corporation is in NJ, subject to constitutionaldividends, interest) limits.

Inter-Affiliate Charges Allowed. Generally eliminates deduction for inter-affiliate interest

payments (unless arm’s length terms and comparably taxedto recipient) as well as royalties and other intangibleexpenses paid to affiliates. Generally eliminates allinter-corporate charges if not fair compensation and may force consolidated return approach and new allocationof charges.

NOL Carryover 7-year carryover. Suspension of carryover into 2002 and 2003 (but 2 yearsadded to 7-year carryover period at end).

Partnerships (including No processing fees. $150 per partner/member processing fee up to maximumGP, LP, LLP and LLC) of $250,000 – paid for current year and 1/2 of next year in with more than 2 owners advance, with overpayment credited to future obligations.



www.flastergreenberg.c

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Tax & Corporate Practice Group ServicesFederal and State Taxation◆ Tax planning

◆ Corporations, partnerships and LLC’s

◆ Sales, mergers and acquisitions

◆ IRS rulings

◆ Tax litigation

◆ Tax collections/liens

Business Corporate Services◆ Business formations

◆ Structuring ownership arrangements◆ Corporate control/management

contracts◆ Shareholder disputes◆ Contracts

◆ Sales, commercial mergers and

acquisitions◆ Securities and finance

◆ Buy-ins/Buy-outs

◆ Employee agreements and

terminations

Wealth Preservation and Transfer◆ Estate planning

◆ Drafting wills, trusts and other estate

planning documents◆ Administration of estates and trusts

◆ Guardianships and conservatorships

◆ Litigation involving trusts and estates

◆ Asset protection

◆ Business transfers from one generation

to the next

Technology, E-Commerce andInternet◆ Contract agreements◆ Protecting intellectual property rights

◆ Licensing

◆ Government regulation

◆ Venture capital

Employee Benefits◆ Implementation and administration of

qualified retirement plans◆ Employee Stock Ownership Plans

(ESOPs)◆ Stock options, phantom stock and SAPs

◆ Plan qualification, IRS audits and

compliance issues◆ Cafeteria plans and other welfare

benefit programs◆ Employee benefit trusts◆ Deferred compensation arrangements

This report is for general use andinformation, and the content shouldnot be interpreted as rendering legaladvice on any matter. Specific situationsmay raise additional or differentissues and such information shouldbe coordinated with professionallegal advice.

Aspect of Tax Prior Law New Law All partnerships (including No tax withholding for non-resident partners. Partnerships must withhold and remit income taxes forGP, LP, LLP and LLC) non-resident partners.

Professional Service No processing fees. $150 processing fee for each licensed professional up toCorporations maximum of $250,000 – paid for current year and 1/2 of

next year in advance, with overpayment credited tofuture obligations.

R & D Deduction Allowed. Eliminates deduction used to claim NJ R&D credit butnot Federal R&D credit.

Job Investment Tax Allowed. Enhanced and extended to “mid-size” business (i.e., withCredit $5 million or less in payroll and $10 million or less in

gross receipts).

3rd Quarter Estimated Due on 15th day of 9th month. For fiscal years beginning after 2002, 3rd Quarter paymentTax Payment obligation is accelerated into 2nd Quarter for corporations

with gross receipts above $50 million.

4th Quarter 2002 25% of total estimated income calculated under 25% of total estimated income calculated under new law.Estimated Tax Payment old law.

Effective Date of Act Tax years beginning on or after January 1, 2002.

Estate Tax Law ChangesAspect of Tax Prior Law New LawEstate Tax Changes Equal to the federal estate tax credit for state Equal to federal estate tax credit for state death taxes as

death taxes less the New Jersey Transfer if computed under 2001 law (with an ApplicableInheritance Tax paid and hence no additional Exclusion Amount of $675,000) less New Jersey cash outlay. Transfer Inheritance Tax paid. Therefore, the increase in

federal estate tax exclusion will not reduce the New Jersey Estate Tax and many estates exempt from federal estate tax

will now have to pay substantial New Jersey Estate Tax.

Effective Date of P.L. Estates of decedents dying after 12/31/01.2002, Chapter 31(Estate Tax Changes)



1810 Chapel Avenue WestCherry Hill, NJ 08002-4609

Tax & Corporate Practice GrouRichard J. Flaster

Harvard Law School, J.D. 1966

Stephen M. Greenberg Yale Law School, J.D. 1976

Laura B. WallensteinRutgers Law School, J.D. 1977

New York University Law School, L.L.M. 1981 Allen P. Fineberg

Columbia Law School, J.D. 1979Markley S. Roderick

University of Virginia Law School, J.D. 1982Peter R. Spirgel

Georgetown Law School, J.D. 1985Temple Law School, L.L.M. 1988

Alan H. ZuckermanCPA 1982; Temple Law School, J.D. 1985

William S. SkinnerUniversity of Pennsylvania Law School, J.D. 1986

Elaine J. Petruzziello Willamette University, J.D., MBA 1985

University of Denver, L.L.M. 1986 Jeffrey S. Brenner

Rutgers Law School, J.D. 1989Elliot D. Raff

University of Wisconsin Law School, J.D. 1990 Aaron C. Buser

Rutgers Law School, J.D. 2001Kristine M. Byrnes

Rutgers Law School, J.D. 1994Mitchell R. Cohen (Of Counsel)

Temple University Law School, J.D. 1979Marc Garber (Of Counsel)

Duquesne University School of Law, J.D. 1981

Office LocationsCommerce Center1810 Chapel Avenue WestCherry Hill, NJ 08002-4609(856) 661-1900

300 Walnut StreetPhiladelphia, PA 19106

(215) 922-4000

190 S. Main Road Vineland, NJ 08360(856) 691-6200

216 North AvenueCranford, NJ 07016(908) 245-8021

2900 Fire Road, Suite 102A Egg Harbor Township, NJ 08234

(609) 645-1881

Practice AreasBankruptcy • Business and Corporate Services • Closely-Held and Family Businesses• Commercial Litigation • Commercial Real Estate • Construction Law • EmployeeBenefits • Employment and Labor Law • Environmental Law • Estate Planning and

Administration • Family Law and Adoption • Financial Work-Outs • Health Care• Land Use • Pension and Retirement Plans • Securities Regulation • Taxation• Technology and Emerging Businesses

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