New Jersey: Division Issues Guidance on Revising Affiliated Group Election

On January 13, 2021, the New Jersey Division of Taxation issued a revised Technical Bulletin addressing combined group filing methods. The document generally addresses the three types of combined return filing methods: water’s-edge, world-wide, and affiliated group. Recall, on November 4, 2020, legislation retroactively revising certain aspects of the Corporation Business Tax (CBT) Act was signed into law.  One of the changes was that for privilege periods ending on or after July 31, 2019, an affiliated group for purposes of the affiliated group filing election now includes certain non-US entities.  The term “affiliated group” is generally defined with reference to IRC section 1504, except that the New Jersey affiliate group includes all U.S. domestic corporations that are commonly owned. Under the revised law, “U.S. domestic corporations” was newly defined to include any entities incorporated or formed under the laws of a foreign nation that are required to file federal tax returns if such entities have effectively connected income within the meaning of the IRC. Once made, the affiliated group election is binding for the year of the election and the five subsequent privilege periods.

In revised Technical Bulletin 89, the Division announced that because of the retroactive law change, it is providing a one-time exception to allow a change to the combined group’s filing method used on the 2019 return when the 2020 CBT return is filed. The election made in 2019 will not be binding for subsequent periods, and privilege period 2020 will mark the beginning of a new binding period. Importantly, no retroactive changes will be permitted with respect to elections made for the 2019 privilege periods. In other words, no amended returns changing a filing election or reverting to the default water’s-edge filing methods will be permitted.  Importantly, the Bulletin does not provide any guidance on what taxpayers should do if they filed their 2019 returns prior to the law change being enacted.  Please contact Jim Venere at 973-912-6349 with questions on TB-89(R).