New Jersey: Guidance Issued on Section 163(j) Limitations

The New Jersey Division of Taxation recently issued Technical Bulletin 87, which provides guidance on the computation of the IRC section 163(j) limitation for New Jersey purposes. The Bulletin notes that under the proposed federal regulations, taxpayers filing a federal consolidated return are generally treated as one taxpayer for purposes of computing the IRC section 163(j) limitation (i.e., the limitation applies at the federal consolidated tax return filing level and that group has a single IRC section 163(j) limitation). Under New Jersey law, the starting point for computing taxable income is entire net income before net operating losses and special deductions with several state specific modifications. Citing to the MCI Communications Services case, the Division notes that a taxpayer’s entire net income as reported on a federal consolidated return must match the taxpayer’s entire net income reported before New Jersey modifications, despite the fact that the taxpayer’s New Jersey return is filed on a separate entity basis.  

The Bulletin also notes that for privilege periods beginning after December 31, 2017, section 163(j) applies in New Jersey on a “pro-rata basis to interest paid to both related and unrelated parties, regardless of whether the related parties are subject” to the state’s addback rules. There were no changes to New Jersey law to address the calculation of the 163(j) limitation or to change the fact that New Jersey taxpayers must report what is reported on line 28 for federal purposes. Further, nothing in New Jersey law indicates that the limitation should be computed without regard as to whether the taxpayer was included in a federal consolidated return. Based on these premises, the Division offered the following guidance in Technical Bulletin 87. Taxpayers that file separate New Jersey Corporation Business Tax returns, but file a single federal consolidated return together are treated as one taxpayer for purposes of the IRC section 163(j) limitation. The separate filer’s 163(j) limit will be the entity’s portion of the overall 163(j) limitation of the consolidated group as determined under the interest income and interest expense allocation provisions contained in the federal proposed 163(j) regulations.

In the Bulletin, the Division also addressed the computation of the limitation under combined reporting. Recall, New Jersey has adopted mandatory unitary combined reporting for privilege periods ending on or after July 31, 2019. The Bulletin concludes that members of the combined group will be treated as one taxpayer for purposes of applying the IRC section 163(j) limitation rules even in instances in which some of the New Jersey combined group members were not included on the same federal consolidated return. If there are taxpayers that are in the same federal consolidated return that are not included in the same New Jersey combined return, the taxpayers will still be treated as one taxpayer for purposes of computing the limitation. Please contact Jim Venere at 973-912-6349 with questions on Technical Bulletin-87 (issued April 12, 2019).