N.J.A.C. 18:7-21.27 - Principles of Federal Consolidated Returns Applicable

(a) The principles and provisions set forth in Federal regulations promulgated pursuant to I.R.C. § 1502, shall apply to the extent consistent with the Corporation Business Tax Act, New Jersey combined group membership principles, New Jersey combined unitary return principles, and rules promulgated by the Director.

(b) When computing the combined group entire net income, the principles set forth in the U.S. Treasury regulations promulgated at I.R.C. § 1502 shall generally apply to the extent consistent with the New Jersey Corporation Business Tax Act and the unitary business principle to a combined group filing a New Jersey combined return as though the combined group filed a Federal consolidated return.

(c) For New Jersey corporations business tax purposes, tax rates, tax computations, estimated payment provisions, and due dates are different than Federal requirements.

(d) The New Jersey Corporation Business Tax Act (Act) has its own definitions and its own included and excluded entity provisions, which differ from the Internal Revenue Code. The Act has its own additions, deductions, exclusions, and other modifications to the entire net income. New Jersey combined returns are filed using a default mandatory water's-edge filing method or the elective worldwide or affiliated group filing method. To be included on a water's-edge return or worldwide return, an entity needs to be part of a unitary business of the combined group as defined in the Act. Water's-edge and worldwide returns are State tax concepts, not Federal consolidated return concepts (see N.J.S.A. 54:10A-4.11 and N.J.A.C. 18:7-21.15 and 21.16 for more information). The composition of the New Jersey affiliated group combined return for New Jersey purposes may be larger than the Federal affiliated group because there are specific New Jersey inclusions and exclusions. For combined groups, New Jersey has its own payment, accounting period, and liability provisions (N.J.S.A. 54:10A-4.8 and 54:10A-4.10). The managerial member of the New Jersey combined group (which may be a different corporation than the corporation filing the Federal consolidated return on behalf of a Federal consolidated group) files the combined return on behalf of the combined group.

(e) For New Jersey combined reporting purposes, the requisite ownership threshold is more than 50 percent. Although the Federal rules otherwise apply, New Jersey does not conform to the 80 percent ownership required for Federal consolidated returns. If a New Jersey combined group composition is different than the Federal consolidated return, the group must compute the combined group entire net income as though the entire group filed a Federal consolidated return and then make the New Jersey additions, deductions, exclusions, and other modifications.

(f) Generally, the provisions at 26 CFR 1.1502-13 apply, except as otherwise noted at N.J.S.A. 54:10A-4.6.e and except where 26 CFR 1.1502-13 deals with specific provisions of the Internal Revenue Code to which New Jersey does not conform.

(g) The Federal consolidated return rules in relation to depreciation and expensing apply, except that New Jersey has decoupled from I.R.C. § 168(k) bonus depreciation and I.R.C. § 179 expensing provisions and certain other depreciation and expensing provisions. See N.J.S.A. 54:10A-4(k)(1), 54:10A-4(k)(2)(F), 54:10A-4(k)(12), and 54:10A-4(k)(13). Adjustments must be made, accordingly.

(h) To the extent consistent with the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), the Federal rules and regulations governing consolidated return net operating losses and net operating loss carryovers shall apply to the New Jersey net operating loss carryover provisions at N.J.S.A. 54:10A-4.6.h as though the combined group filed a Federal consolidated return, regardless of how the members of the combined group filed for Federal purposes.

1. Federal carrybacks do not apply because New Jersey net operating losses can only be carried forward for 20 privilege periods.

2. For privilege periods beginning on and after January 1, 2020, the provisions of the Internal Revenue Code, the Federal rules, limitations, and restrictions, thereto, governing Federal net operating losses and Federal net operating loss carryovers with regard to, but not limited to, mergers, acquisitions, reorganizations, spin-offs, split-offs, dissolution, bankruptcy, or any form of cessation of a business, or any other provision that limits or reduces Federal net operating losses and Federal net operating loss carryovers, shall apply to New Jersey net operating loss carryovers pursuant to subsection (v) of section 4 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-4) and the New Jersey net operating loss carryover provisions of subsection h. of section 18 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.6).

3. The provisions of the I.R.C. governing the interaction between I.R.C. § 172 and 250 that limits or reduces Federal net operating losses and Federal net operating loss carryovers, shall apply to New Jersey net operating loss carryovers pursuant to subsection (v) of section 4 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-4) and the New Jersey net operating loss carryover provisions of subsection h of section 18 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.6) for net operating losses and net operating loss carryovers generated in privilege periods ending before July 31, 2023, but not to net operating losses and net operating loss carryovers generating in privilege periods ending on and after July 31, 2023.

4. The Federal rules and limitations at I.R.C. § 172(a)(2) apply for privilege periods ending on and after July 31, 2023, when subtracting any net operating losses (and when they are utilized by the taxpayer as a carryover) when calculated pursuant to N.J.S.A. 54:10A-4(v) or 54:10A-4.6.h (and when they are utilized by the taxpayer as a carryover) when calculating taxable net income. The limitation set forth in paragraph 2 of subsection (a) at I.R.C. § 172 (26 U.S.C. § 172(a)(2)) shall apply, except that August 1, 2023, is substituted for the reference to January 1, 2018, in subparagraph (A) of paragraph (2) of subsection (a) at I.R.C. § 172 (26 U.S.C. § 172), and July 31, 2023, is substituted for the reference to December 31, 2017, in subparagraph (B) of paragraph (2) of subsection (a) at I.R.C. § 172 (26 U.S.C. § 172).

(i) There are interactions between N.J.S.A. 54:10A-4.15 (in periods prior to repeal), 54:10A-4.6.d, 54:10A-4(k)(5), 54:10A-4.5.c, 54:10A-4.6.n, 54:10A-4(v), 54:10A-4.6.h, 54:10A-4.6.m, and 54:10A-5.46, impacting dividends, the dividend exclusion, GILTI, FDII, Net Operating Losses (NOLs), and special deductions as noted in this subsection.

1. The Federal dividend received deductions (DRD) are special deductions for Federal purposes, which are adjustments below line 28. As such, these provisions in the Federal consolidated rules do not apply for New Jersey purposes. New Jersey has its own dividend exclusion (see N.J.S.A. 54:10A-4(k)(5)). The rules and limitations governing the Federal dividend received deductions were not incorporated into N.J.S.A. 54:10A-4(k)(5). Pursuant to N.J.S.A. 54:10A-4.6.d, dividends paid by one member to another member of the combined group are eliminated from the income of the recipient. Furthermore, there also is a New Jersey corporation business tax credit for certain dividends received from non-combined subsidiaries (or a separate combined group that files its own New Jersey combined return and is itself a subsidiary), see N.J.A.C. 18:7-3.28.

2. The NOL-DRD ordering rules found at N.J.S.A. 54:10A-4(u), 54:10A-4(v), and 54:10A-4.6.h(1) (by operation of N.J.S.A. 54:10A-4(v)) also apply because they are provisions of the Corporation Business Tax Act. The Federal limitations that govern the interaction of the Federal net operating losses/net operating loss carryovers and the Federal dividend received deductions do not apply because the Federal dividend received deductions are special deductions under the Internal Revenue Code. Likewise, the Federal dividend deduction rules do not apply to N.J.S.A. 54:10A-4(k)(5) since the Federal dividend received deductions are special deductions for Federal purposes.

3. For periods ending before July 31, 2023, the only Federal rules with regard to a Federal special deduction that apply are the rules in relation to I.R.C. § 250 (see N.J.S.A. 54:10A-4.15, which specifically coupled the Act to I.R.C. § 250) and none of the other Federal rules governing Federal special deductions apply. For periods ending on and after July 31, 2023, New Jersey does not conform to any of the Federal special deductions, and none of the rules governing Federal special deductions are applicable.

(j) New Jersey has its own tax credits and its own rules for tax credits, except regarding the New Jersey Research Tax Credit. Although the New Jersey Research Tax Credit has its own specific limitations, the Federal rules governing I.R.C. § 41 apply.

(k) In general, New Jersey follows the guidelines set forth pursuant to the Federal consolidated return regulations regarding I.R.C. § 108.

(l) For more on the interaction of the Federal rules in relation to New Jersey net operating losses and net operating loss carryovers (but not prior net operating loss conversion carryovers), see N.J.S.A. 54:10A-4(w), 54:10A-4.6, and 54:10A-4.5.c.