December 2012

Improving State Business Taxes

By Michael Silverstein, Contributing Writer

While companies are realizing savings due to recent tax reforms in New Jersey, small businesses continue to feel financial burdens.

Around the country, states are seeking to make themselves more appealing to businesses via tax law changes. This has certainly been the case in New Jersey.

Changes mandated in New Jersey’s FY 2012 budget are estimated to save businesses $347.5 million. Tax savings to business will statutorily increase over the next four years to a savings of $660 million annually, totaling about $2.3 billion over four years.

In conversations with some of New Jersey’s leading tax practitioners, we heard how these tax changes are affecting their own clients. It also became clear in these conversations, however, that for many enterprises in the state, especially smaller, closely held ones, state taxes continue to be a much too onerous burden.

The Single Sales Factor

One significant change in New Jersey business tax law that became effective this year involves the single sales factor way to apportion the corporate income tax. Beginning in tax year 2012, income for tax purposes is weighted 70 percent on sales, 15 percent on property and 15 percent on payroll. For tax year 2013, it will be weighted 90 percent on sales, 5 percent on property and 5 percent on payroll. Thereafter, corporate taxes here will be based purely on sales.

Hardeo Bissoondial, partner in the state and local tax practice of PricewaterhouseCoopers in Florham Park, whose mixed group of clients include large pharmaceutical and technology firms, says that though many other states also use a three-part way of computing income, in the past, companies in New Jersey usually had higher taxes because of the state’s own mode of computation. “For New Jersey manufacturers that ship around the country and the world; in terms of their effective state tax rate, this [2012] change is significant,” he says. The benefits of this change, he adds, are probably “most important for capital intensive companies that ship elsewhere.”

Bissoondial offers one example of an immediate boost the state enjoyed because of this tax law change. “I actually had a client on the New York border considering a move to New Jersey,” he says. “This client’s company would have been hurt on taxes, until the change. Once the law was passed, we ran the calculations and found the move was competitive.”

Not all new tax law breaks, of course, affect companies of different sizes equally. Consider in this regard the increase in the state’s Research and Development Tax Credit program.

Anne D’Amico, associate partner with Alloy Silverstein Shapiro Adams Mulford & Co. in Cherry Hill, says that among her own client base of small and closely held companies, not one had ever used a state R&D credit. Another practioner, Paula Vuksic, tax partner with Citrin Cooperman in Springfield, who does a lot of work with companies in the $50,000- to $3-million range, likewise reported no clients needing or using R&D credits.

Meanwhile, Thomas Roche, a principal at Cranford-based Fazio, Mannuzza, Roche, Tankel, LaPilusa, reports that, at his firm, clients using the R&D credit are “few and far between.”

For some larger corporate clients like Bissoondial’s, however, this R&D-related change is getting attention. “These companies previously had a lot of this credit that was unusable,” he reports. “Now [it] can be used to offset business taxes ... and interest in it is back on the front burner.”

Help For Smaller Firms

Two changes in New Jersey tax law that took effect in 2012 have the potential to benefit some smaller firms that may not have been helped by the changes noted above. They are a 25 percent reduction of the S-corporation minimum tax, and a loss netting/net loss carry forward for non C-corporation businesses.

Some numbers tell the story about how the S-corporation change can help a business. If an S-corp has gross receipts of $100,000, for example, says D’Amico, “it would now pay $375 rather than $500.”

Anne Patracuolla, tax manager, state and local taxes with Wiss & Company in Livingston, notes that because of the S-Corporation related change, “one of my clients paid 11 percent [overall] in state taxes in 2012, compared with 15 percent in 2011.”

The loss netting/net loss carry forward tax change for non C-corporation businesses is designed to help reduce the taxes of owners who operate pass-through businesses, not just S-corporations, but LLCs, partnerships and sole proprietorships. Some of these enterprises derive income from different sources, and the new law grants a limited offset among specified categories of business-related income.

There are 16 income related categories under New Jersey law, and four of these can now be netted. The tax relief here is phased in between tax years 2012 and 2016.

While this tax break has the potential to help some pass-through businesses, to get the benefit requires a complex computation. A New Jersey Business & Industry Association publication suggests it would be prudent for “taxpayers to consult a tax professional when attempting to calculate tax liability under the new law.”

Another important feature of this small business-oriented benefit that became effective in 2012 permits taxpayers to carry forward business-related losses for a period of up to 20 taxable years, a benefit previously only provided to C-Corporations in New Jersey.

About Those Grants

For years, New Jersey has had grant programs in place designed to encourage businesses to locate and expand in the state and increase hiring here. Perhaps the best known is the Business Employment Incentive Program (BEIP). This year, the Grow New Jersey Assistance Program was added to the roster. Administered by the New Jersey Economic Development Authority (EDA), this program allows the EDA to grant tax credits to businesses that meet eligibility qualifications.

Programs like this, however, tend to be used the most by bigger companies. The reason? Because “they often come with so many bells and whistles,” explains Roche.

To qualify for a Grow grant, for example, a business must make a minimum $20 million capital investment in a qualified incentive area; create or retain at least 100 full-time employee positions, which provide employee health benefits under a group health plan; be in an industry identified by the EDA as desirable for New Jersey; and the award of the credit must be a material factor in creating or retaining the minimum number of employees.

A Gradual Process

Making New Jersey more competitive with other states when it comes to taxes isn’t something that can happen all at once. It won’t happen in a single year. It’s an ongoing, a gradual process.

Commenting on this ongoing process, Edward Rigby, a principal in ParenteBeard’s tax services practice in Clark, opines that “in recent years there has [indeed] been some significant progress on the business tax front.” He cites as an example the repeal of the “Throwout Rule,” a repeal that became effective in 2010. While in place, this Rule had increased the tax burden of many corporations in the state.

Also in 2010, notes Patracuolla, “the state eliminated its ‘regular place of business’ requirement — which mandated that a company must have a regular place of business in another state (rather than, say, just a trailer on a contractor’s work site in another state) in order to apportion less than all its income for New Jersey tax purposes.

When you couple the 2010 tax changes with the substantial tax changes instituted by Governor Christie and the Legislature starting in tax year 2012, it is clear that changes in tax policy are at the top of the agenda.

Bissoondial summed up a lot of tax practitioners’ feelings about the positive movements in this realm this way: “If you had asked me two years ago, I would have said New Jersey was at the bottom of the pack in terms of high business taxes. ... In the last two years, it has become a lot more business friendly.”

A Basics Focus

While changes in state tax laws this year and in recent years have generally garnered favorable comments from tax practitioners, many still point to the state’s tax rates as a huge impediment to business growth. “A lot of smaller companies are not getting a lot of tax benefits,” says Roche. “New Jersey is still not competitive here with other states.”

Yes, says Rigby, “the changes have improved things. It has been positive. There’s greater interest in the allocation area ... for pass through entities. But the biggest problem remains rates, for both individual and companies.”

D’Amico makes the same point. “The changes haven’t had a significant effect on my own clients. What would help them greatly is individual tax rate changes - and that hasn’t happened." Vuksic agrees, noting “the really big thing for most of my clients is competitive tax rates.”

Governor Christie proposed a 10 percent across the board income tax cut for the FY2013 budget, but an agreement with the Legislature could not be obtained. While $183 million has been set aside to fund the first year of a multi-year income tax cut, revenues must come in stronger before such a cut will be implemented.

Even so, each company’s specific circumstances generally dictate whether or not they will decide to call New Jersey home.

Patracuolla, for example, reports a client with a business in New York City who could have moved it to either New Jersey or Pennsylvania, where the top state tax rate is much lower. “After we did a study on where he should move his headquarters, he chose to move to New Jersey,” she says. “He didn’t choose Pennsylvania because of facilities in the New Jersey area, like the Newark Liberty International Airport.”

Summing up, Rigby states: “The big thing for each company I deal with is still the basics. ... First you work to net out all the deductions a particular kind of business is already entitled to and work through that checklist. Then you focus on changes.”  

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