It is common knowledge that business taxes greatly impact a state’s economic growth and market attractiveness, and we see this playing out for corporations in New Jersey. On July 3, 2023, New Jersey Governor Phil Murphy signed major tax legislation, A.B. 5323, which brought some significant changes to the existing corporate business taxes in the state. Today, we see businesses and major corporations adjusting to the challenges of these recent changes and conforming to the status quo. This article reviews the possible effects of these reforms on such corporations and how they can overcome the struggles that come with them.
New Jersey’s Recent Taxation Reforms
The Corporation Business Tax Act changes were signed into law on July 3, 2023, introducing certain modifications that have been significantly impacting operations for major businesses in the state. Some of the provisions include but are not limited to the following:
- A 95% deduction for Global Intangible Low-Taxed Income (GILTI) income
- Adoption of the federal 80% Net Operating Loss (NOL) limitation
- New Corporate Income Tax (CIT) return filing as the 15th of the month
- New Jersey now conforms to the 80% restriction on the usage of NOLs under Internal Revenue Service (IRC) Section 172
- Corporations are now subject to the Corporation Business Tax (CBT) if they derive receipts above $100,000 or have more than 200 separate transactions.
New Jersey has always been on the high end regarding tax rates, and the reforms introduced last year have more than alleviated the existing condition. Data from the Council of State Taxation (COST) revealed that businesses in NJ paid $34.1 billion in state and local taxes for Fiscal Year 2022 (FY22). This figure was categorized as the country’s highest tax rate. In addition, this also means that New Jersey corporations shoulder 45.3% of the state tax burden. This figure is limited to 40% across the board compared to other states.
How Does Taxation Affect Businesses and Corporations?
There are several ways such policies affect businesses, cutting across market attractiveness, competitive advantage, investment exposure, business structure, and profitability. Higher corporate income taxes (CIT) can directly impact profitability, and the COST data reveals how New Jersey businesses have had to pay higher rates compared to other locations. When more money goes into paying for such policies, it leaves less for reinvestment, dividends, and the overall financial growth of an enterprise.
These effects could extend to several businesses and investment institutions. New Jersey houses some of the biggest investment firms, like Prudential Financials and Wells Fargo, that could be affected by its tax policies. According to a report published by Forbes, New Jersey and New York are states with the worst business climate in the United States and the biggest losers in adjusted gross income (AGI). New Jersey lost $3.8 billion in net AGI during the pandemic due to its tax climate index, and this loss is surely a reflection of individual business performances in the state. There is also the possibility of individuals and retail investors utilizing MT4 trading taking a fall alongside.
Investment firms have been known to be more accessible in regions with more favorable policies. Lower taxation jurisdictions attract more businesses and open up more investment opportunities for companies that require debt financing. Choices of entity, employee wages, and benefits are other factors that see a direct impact on a daily basis based on the changes in these policies. There is no avoiding the impacts of taxes on enterprises looking to expand. What can be done is to find effective measures for mitigating these difficulties.
How Businesses Can Adjust to Tax Challenges in New Jersey
Corporations can respond to these higher taxes in several ways, including passing on tax burdens to other entities, reducing expenses, and filing for tax credits and deductions.
Diverting Burdens to Other Entities
This is one of the most common responses companies employ in such circumstances. While it mightn’t be pleasurable to the parties on the receiving end, there is mostly no other way around it. The solution of a heightened price in goods and services often meets an increase in tax rates. It is an expected economic response that many companies have no choice but to explore to balance things out.
Reducing Operational Expenses Or Increasing Revenue
Operations costs in this scenario could include reducing employee bonuses and cutting wages or research and development expenditures. Specific bonuses and privileges gotten by their workers might have to go. At the same time, such companies could boost revenues to meet the existing realities. Reducing the cost of operation is an obvious effect of these policies on several enterprises, and it might be advisable to cut these costs in your jurisdictions rather than wait till you’re compelled to do so due to a failing business. A report released by Insidernj revealed that the number of Fortune 500 companies headquartered in New Jersey reduced from 22 in 2006 to 15 in 2021, and some of these mitigations are attributed to the steep taxation climate in the state. We see large companies taking measures by relocating to states with lower operational costs.
Maximizing Tax Credits
New Jersey offers some tax credit benefits for businesses. A few of the programs running for this purpose include:
- Manufacturing equipment and employment investment credit Programs
- Research and Development Credit Program
- Urban Enterprise Zone Credit Program
- Purchasing tax credit
These programs were implemented to alleviate burdens on corporate institutions and enterprises. If you’re looking to maximize your business’s tax credit, looking up New Jersey state corporation business tax credits and incentives information is a good start. Click the link to find out tax credits available for you.
Navigating New Jersey for Business Growth
There is no escaping government-induced fees for businesses, and the law will always change — some favorable, some less so. The affected parties must constantly find ways to evolve with these laws. If the mitigation plans suggested above don’t work for your industry, consider moving your business to a location with lighter taxation.
According to a report by Forbes, New Jersey has been last in state taxes ranking since 2018. While it has struggled with bad taxes over the years, other states have improved their ranking. Arizona jumped 7 places higher, now placed 14th in the country. Mississippi also improved, moving 20th place from its previous 27th position. Other places are doing better with more accommodating laws for businesses. Now that you know what taxation issues your enterprise can encounter, you can use this article to guide your next step.
About the Author/s
The New Jersey Digest is a new jersey magazine that has chronicled daily life in the Garden State for over 10 years.
