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CARES Act Could Result in Taxation of More GILTI in New Jersey

The federal stimulus bill (the CARES Act), HR 748, which was signed into law by President Trump on March 27, includes certain corporate income tax provisions designed to provide relief to corporate taxpayers. One such provision–the net operating loss (NOL) provision that allows taxpayers to carryback NOLs to prior years–could have unintended consequences at the state level. For some taxpayers, the carryback of NOLs to 2018 and 2019 could reduce the deductions allowed pursuant to IRC § 250 applicable to global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) generated in those years. While this will obviously have federal income tax consequences it will also have consequences in states that tax GILTI and allow the deductions in IRC § 250. This blog post focuses on the consequences of the NOL rules to the New Jersey Corporation Business Tax (CBT), but the issue could arise in other states, including, for example, Nebraska and Iowa.

 

The state issue is based on the mechanics of the federal GILTI and FDII deductions computed pursuant to IRC § 250. IRC § 250(a)(1) provides a 50% deduction for GILTI and a 37.5% deduction for FDII. However, IRC § 250(a)(2) then provides that, if the amount of a taxpayer’s GILTI and FDII, net of the related IRC § 250 deductions, exceeds the taxable income of the taxpayer determined without regard to the IRC § 250 deductions, then the amount of the IRC § 250 GILTI and FDII deductions will be reduced.  In determining “taxable income” for such purposes, a taxpayer has to include its NOLs, so if a taxpayer carries back NOLs and uses them to reduce its taxable income in 2018 and 2019, the amount of the taxpayer’s GILTI and FDII deductions could also be reduced.

New Jersey is notorious for being one of the states to tax GILTI. New Jersey includes GILTI computed under IRC § 951A in the tax base, but then allows the IRC § 250 GILTI deduction; as a result, for many taxpayers, New Jersey ultimately taxes 50% of GILTI. While New Jersey does not follow the federal NOL rules, it does specifically link its GILTI deductions to IRC § 250. Accordingly, the carryback of NOLs at the federal level could result in a reduction of the GILTI deduction that the taxpayer can take for New Jersey CBT purposes. As a result, New Jersey could end up taxing far more than 50% of a taxpayer’s GILTI. The carryback of NOLs at the federal level could also reduce the amount of the FDII deduction that can be claimed in New Jersey.

As mentioned above, this issue also arises in other states that tax GILTI and tie to the federal IRC § 250 deduction.

© 2020 McDermott Will & Emery

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About this Author

Alysse McLoughlin attorney state and local tax matters, financial services companies MCDermott Will New York
Partner

Alysse McLoughlin is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office.  She focuses her practice on state and local tax matters, with particular skill working with financial services companies.

Alysse was most recently the head of state tax at Barclays Capital, where she was responsible for all including income, franchise, sales and use, and excise tax issues.  Her responsibilities included establishment of state tax return filing positions and reserves, participation in the financial...

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Kathleen Quinn, McDermott Will, State Tax Matters Lawyer, Corporate Development Attorney
Associate

Kathleen Quinn focuses her practice on state and local tax matters. She has represented corporations and individuals in New York State and New York City income tax controversies. She also has advised clients on the state and local consequences of corporate restructurings and other business transactions.

Previously, Kathleen worked at a Big Four accounting firm, where her practice focused exclusively on state and local tax.

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