N.J.A.C. 18:7-21.7 - Determining the Entire Net Income of the Combined Group

(a) Each taxable member of a combined group shall determine its entire net income from the unitary business as its share of the entire net income of the combined group in accordance with a combined unitary tax return. The combined group's entire net income is the aggregate sum of entire net income or loss, subject to allocation and derived from a unitary business, or the aggregate sum of entire net income or loss of a New Jersey affiliated group in the case of an affiliated group election, as reported on a combined return of every taxable member and non-taxable member of the combined group. The entire net income from the unitary business of a combined group shall be determined as follows:

1. For a member incorporated in the United States, the entire net income to be included in the income of the combined group shall be the member's entire net income otherwise determined pursuant to the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.).

2. For a member not incorporated in the United States, the income to be included in the entire net income of the combined group shall be determined from a profit and loss statement that shall be prepared for each foreign branch or corporation in the currency in which the books of account of the branch or corporation are regularly maintained, and shall be adjusted to conform to the accounting principles generally accepted in the United States for the presentation of those statements and further adjusted to take into account any book-tax differences required by Federal or State law. The profit and loss statement of each foreign member of the combined group and the allocation factors related thereto, whether United States or foreign, shall be translated into or from the currency in which the parent company maintains its books and records on any reasonable basis consistently applied on a year-to-year or entity-by-entity basis. Income shall be expressed in United States dollars. In lieu of these procedures and subject to the determination of the Director that the income to be reported reasonably approximates income as determined pursuant to the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), income may be determined on any reasonable basis consistently applied on a year-to-year or entity-by-entity basis. See N.J.A.C. 18:7-21.8 for more information.

i. The International Financial Reporting Standards (I.F.R.S.), which are issued by the International Accounting Standards Board (I.A.S.B.), qualifies as an acceptable method that "reasonably approximates income" if that is the only method of accounting the specific entity used.

ii. For water's-edge combined group or affiliated group combined return, for a member that is incorporated or formed in a foreign nation with a comprehensive tax treaty with the United States, entire net income shall not include an item of income or loss excluded or exempted from Federal taxable income pursuant to the terms of the treaty, and no other deduction, exclusion, or elimination will be permitted for such income and loss items excluded by this paragraph.

iii. For a non-U.S. corporation that is a member of a water's-edge group or affiliated group New Jersey combined return, the member shall only include in entire net income the following: in the case of a member that files a Federal tax return, the member shall only include the member's effectively connected income or loss reported for Federal purposes, as modified by the provisions of the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.); and in the case of a member that does not file a Federal tax return but that has United States source income or loss, the member shall only include that United States source income or loss, as modified by the provisions of the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), to the extent that United States source income or loss would otherwise be effectively connected income or loss if the member would have been conducting a business that is effectively connected to the United States. For the purpose of determining what income or loss to include in entire net income pursuant to this paragraph, the member shall take into account only the items of expense and allocation factor receipts attributable to that income or loss.

(1) With regard to a member that has U.S. source income or loss but did not file a Federal tax return, when computing its entire net income or loss, the member will compute its income or loss as though the member was conducting a business effectively connected to the United States, and only include the U.S. source income that would be effectively connected income or loss pursuant to the Internal Revenue Code, had the member been conducting a business effectively connected to the United States.

(2) Non-U.S. corporations that are members of combined groups (filing on an affiliated group or water's-edge group basis) are not required to add back the items of income (or loss) not included in Federal taxable income because those items are excluded from Federal taxable income as the result of the tax treaty between the nation of incorporation and the United States. The member must report such items of income (or loss) and amounts reported to the Federal government by providing a copy of the form 8833 filed with the Federal government to the managerial member to attach to the combined return. In the event that the member did not file any return or form with the Federal government, but the member is treaty protected, a pro forma form 1120-F and a pro forma form 8833 must be prepared and attached to the combined return for that member.

iv. For a world-wide group, pursuant to N.J.S.A. 54:10A-4(kk), the combined group shall include all of the income and attributes of such members regardless of how or whether such members file Federal returns or report or include such income in Federal taxable income, without regard to any exemption or exclusion from Federal taxable income pursuant to the terms of a tax treaty; provided, however, any deductions allowed pursuant to the Federal Internal Revenue Code that are allowable pursuant to the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), that would apply to a U.S. corporation but for which a non-U.S. corporation is prohibited for Federal corporation income tax purposes because said income was either not included in Federal taxable income for any reason or because said corporation is a non-U.S. corporation, shall be allowed for such non-U.S. corporation members of the combined group for New Jersey Corporation Business Tax purposes as though said non-U.S. corporation members were U.S. corporations.

v. Where there are material differences in accounting methods between U.S. G.A.A.P. and I.F.R.S. that cause a material numerical difference, taxpayers must include an explanation for the difference in their books, records, and work papers, which shall be made available to the Division of Taxation upon request.

(b) Income from a partnership where a member of the combined group is a partner is as follows:

1. If a member of a combined group receives income from the unitary business from a partnership, the combined group's entire net income shall include the member's direct and indirect distributive share of the partnership's unitary business income.

2. The distributive share of income received by a limited partner from a qualified investment partnership shall not be considered to be derived from a unitary business, unless the general partner of such investment partnership and such limited partner have common ownership. To the extent that the limited partner is otherwise carrying on or doing business in New Jersey, it shall allocate its distributive share of income from a qualified investment partnership, in accordance with subsection (a) of section 3 at P.L. 2001, c. 136 (N.J.S.A. 54:10A-15.6) or subsection (a) of section 4 at P.L. 2001, c. 136 (N.J.S.A. 54:10A-15.7), as applicable. If the limited partner is not otherwise carrying on or doing business in New Jersey, its distributive share of income from an investment partnership is not subject to tax pursuant to this chapter.

3. For privilege periods ending on and after July 31, 2023, if a member of a combined group receives income from the unitary business from a partnership, the combined group's entire net income shall include the member's direct and indirect distributive share of the partnership's unitary business income, and the unitary partnership shall not be liable for the portion of the payment imposed pursuant to N.J.S.A. 54:10A-15.11 that is directly, or indirectly in the case of a tiered partnership, attributable to that member.

(c) All the dividends and deemed dividends paid by one member to another member of the combined group shall be eliminated from the income of the recipient. Any dividends that are not eligible for elimination (that is, dividends from subsidiaries not included as members of the combined group) may be eligible for exclusion pursuant to N.J.S.A. 54:10A-4(k)(5).

1. Where a taxpayer is a member of a combined group and receives dividends from a subsidiary that is not included in the combined return, the dividends must be included in the entire net income of the taxpayer pursuant to N.J.S.A. 54:10A-4(k)(5). For privilege periods ending on and after July 31, 2020, the members of a combined group filing a New Jersey combined return shall be treated as one taxpayer with regard to dividends and deemed dividends that were received as part of the unitary business of the combined group.

2. If the dividends and deemed dividends are not part of the unitary business of the combined group and are paid to a member of the group, the income is included on Schedule X in such recipient member's income and the dividend exclusion pursuant to N.J.S.A. 54:10A-4(k)(5) is applied against the separate income of such member on Schedule X.

3. For a combined group with a fiscal 2018 privilege period that ended on or after July 31, 2019, where the combined group included both U.S. domestic corporations as members and non-U.S. corporations as members, and pursuant to the applicability dates at 26 CFR 1.965-9(a) for U.S. domestic corporations that were required to include the deemed repatriation dividends from those non-U.S. corporations in entire net income during that fiscal period for which the first New Jersey combined return is due, the deemed repatriation dividends shall be eligible for the intercompany dividend elimination.

4. For privilege periods ending on and after July 31, 2023, the income amounts required to be included in Federal taxable income pursuant to 26 U.S.C. § 951A, shall be considered a dividend.

(d) Except as otherwise provided for in this section, business income from an intercompany transaction among members of the same combined group shall be deferred in a manner similar to the deferral at 26 CFR 1.1502-13. If one of the events at either (d)1 or 2 below occurs, deferred income resulting from an intercompany transaction among members of a combined group shall be restored to the income of the seller and shall be included in the net income of the combined group as if the seller had earned the income immediately before the event.

1. The object of a deferred intercompany transaction is:

i. Resold by the buyer to an entity that is not a member of the combined group;

ii. Resold by the buyer to an entity that is a member of the combined group for use outside the unitary business in which the buyer and seller are engaged; or

iii. Converted by the buyer to a use outside the unitary business in which the buyer and seller are engaged; or

2. The buyer and seller cease to be members of the same combined group, and no portion of the income or loss is included in the entire net income of the unitary group, regardless of whether the buyer and seller remain sufficiently interdependent, integrated, and interrelated through their activities, so as to provide a synergy and mutual benefit that produces a sharing or exchange of value between them.

i. In the case of an event set forth at (d)2 above, no portion of the income or loss shall be included in entire net income of the combined group, but shall be included in the entire net income of the respective member.

(e) A charitable expense incurred by a member of a combined group shall, to the extent allowable as a deduction pursuant to I.R.C. § 170, be subtracted first from the combined group's entire net income, subject to the income limitations of that section applied to the entire net income of the group. A charitable deduction disallowed pursuant to I.R.C. § 170, but allowed as a carryover deduction in a subsequent privilege period, shall be treated as originally incurred in the subsequent year by the same member and the provisions of this section shall apply in the subsequent privilege period in determining the allowable deduction for that privilege period.

(f) Pursuant to N.J.S.A. 54:10A-4.6.j, an expense of a member of the combined group that is directly or indirectly attributable to the income of any member of the combined group, which income this State is prohibited from taxing pursuant to the laws or Constitution of the United States, shall be disallowed as a deduction for purposes of determining the combined group's entire net income.

1. In determining such amounts, the members may use such attribution ratio methods and tracing protocols that the members used for Federal tax purposes.

2. Amounts disallowed pursuant to N.J.S.A. 54:10A-4.6.j will not be required to be added back for the purposes of N.J.S.A. 54:10A-4(k)(2)(I) or 54:10A-4.4.

(g) 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 pursuant to 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. For privilege periods ending on and after July 31, 2023, when subtracting any net operating losses calculated pursuant to N.J.S.A. 54:10A-4(v) or the combined group net operating losses calculated pursuant to N.J.S.A. 54:10A-4.6(h), the limitation set forth at I.R.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) of I.R.C. § 172 (26 U.S.C. § 172).

(h) 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 set forth by the Director. For more information, see N.J.A.C. 18:7-21.27.

(i) For purposes of the deduction allowed in paragraph (4) of subsection (k) of section 4 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-4), a combined group shall be treated as one taxpayer; provided, however, a combined group shall only be eligible for the deduction if at least one of the taxable members is a banking corporation and the taxable member has an international banking facility. The income of the combined group shall not be eligible for the deduction allowed in paragraph (4) of subsection (k) of section 4 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-4), if such income was already eliminated pursuant to this section.

(j) This section shall apply to worldwide group elective combined returns and affiliated group elective combined returns in accordance with section 23 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.11). An election to file an affiliated group combined return shall be an election to treat all of the member's attributes and income as though they were from one unitary business.

(k) Income excluded from Federal taxable income pursuant to a tax treaty is not added back into the entire net income of a combined group filing on either a water's-edge or affiliated group basis, and, thus, no elimination, deduction, or additional exclusion is permitted when computing the entire net income, since said income is not included in the entire net income of the combined group.

1. Example 1: Group A files a water's-edge combined return. Member 1 reports intercompany income for Federal purposes from member 2, and member 2 is incorporated in a high tax jurisdiction that has a comprehensive tax treaty with the U.S., such as Germany, that results in member 2's non-U.S. income being excluded from the Federal taxable income of member 2. Although the income would have been eliminated had the non-U.S. income of member 2 not been treaty protected, when computing the income of the combined group, member 2's treaty protected income is excluded from entire net income of the combined group and member 1 cannot eliminate the income amount by member 2's income that was never included in entire net income for Federal purposes.

2. Example 2: Same facts as (k)1 above except that the income was not income attributable to intercompany transactions between member 1 and member 2. Member 2's non-U.S. treaty protected income is attributable to operations from international shipping. Although the income would have been excludable for member 2 pursuant to N.J.S.A. 54:10A-4(k)(9), since member 2's income is already excluded pursuant to the terms of a treaty, member 2 cannot exclude the income twice.

3. Example 3: Same facts as (k)1 above, except that the income was not income attributable to intercompany transactions between member 1 and member 2. Member 2's non-U.S. treaty protected income is attributable to international banking facility eligible activities in Europe. Although the income would have been eligible for the international banking facility deduction pursuant to N.J.S.A. 54:10A-4(k)(4), since member 2's income is excluded pursuant to the terms of a treaty. Member 2 cannot deduct the income twice.