New Jersey Tax Law Changes Affect Individual and Corporate Taxpayers
Significant tax legislation was recently enacted as a part of the 2004-2005 New Jersey budget. The following is a brief description of some of the significant changes that result from the new legislation:
Tax Increase on Gross Income in Excess of $500,000. The top New Jersey Gross Income Tax rate was increased from 6.37% to 8.97%. The new rate applies to taxable gross income in excess of $500,000, and is retroactive to January 1, 2004. Importantly, commencing September 1, 2004, employers must withhold at the rate of 12% from salaries, wages and other remuneration in excess of $500,000 during the remainder of 2004. Commencing January 1, 2005 the top Gross Income Tax withholding rate will be 9.9%.
New Fees Added to Current Realty Transfer Fees. Prior law provided for a realty transfer fee consisting of three components: the basic fee, the additional fee and the supplemental fee. An additional "general purpose fee" will now be imposed on the seller of real property having a value in excess of $350,000. The new fee applies to the full amount received for the property.
This new "general purpose fee" is $0.90 for each $500 on the first $550,000 of value recited in the deed; $1.40 on each $500 of value between $550,000 and $850,000; $1.90 for each $500 of value between $850,000 and $1,000,000; and $2.15 for each $500 of value over $1,000,000.
The law also imposes a new fee on the purchaser of real property that is zoned residential (whether or not improved) if the purchase price exceeds $1,000,000. The new fee is equal to 1% of the full amount of the purchase price and is in addition to the basic fee, the additional fee, the supplemental fee and the general purpose fee described above.
For example, on the sale of a $2,000,000 home, the seller would have to pay a new general purpose fee of $6,700 in addition to existing realty transfer fees of $14,975. Additionally, the purchaser would have to pay a new fee of $20,000.
The new fees apply to real property transferred on or after August 1, 2004. The Director of the New Jersey Division of Taxation has advised that anyone recording a deed on and after October 1, 2004 who claims that the transfer occurred prior to August 1, 2004 must pay the fees at the new rates when recording the deed and then file a claim for refund to receive a refund of the difference between the old rates and the new rates. Anyone claiming a refund must provide evidence that the closing occurred prior to August 1 (for example, a copy of the closing/settlement statement).
Nonresidents to Pay Estimated Tax on Transfers of Real Property. Nonresident individuals, estates and trusts are now required to pay estimated New Jersey Gross Income Tax on a sale or transfer of real estate located in New Jersey occurring on or after August 1, 2004. The estimated payment must generally be paid at closing. There are certain exemptions from the estimated tax obligations described above, including an exemption for homes used as the taxpayer's principal residence within the meaning of federal tax exemption for sales of principal residences, and an exemption for a conveyance of mortgaged real estate to the lender in foreclosure or in lieu of foreclosure with no additional payments.
Any seller that is not required to pay estimated taxes must submit a completed Seller's Residency Certification/Exemption form at closing. The Director of the Division of Taxation has advised that all deeds submitted for recording on or after October 1, 2004 must have any required estimated tax payments and forms attached.
Verifying Registration of Contractors Doing Business with the State and Other Public Entities. Requirements for verifying the business registration of contractors doing business with the State and other public entities have been revised and expanded. A contractor subject to the legislation must provide a copy of its business registration at the time a bid proposal is submitted, or if no bid is required, then before the issuance of a purchase order or other contracting document. A subcontractor must provide the contractor with a copy of its business registration, which must be forwarded to the applicable contracting agency.
Previously, the contractor business registration program covered providers of goods and services to State agencies, departments, authorities, commissions, instrumentalities, divisions, boards, bureaus and offices and casinos. Under the new legislation, "contracting agency" now also includes any state college or university, county college, local government unit, board of education and certain contractors of water supply and wastewater treatment services.
In addition, the recent legislation imposes certain requirements with respect to collecting and remitting use tax on contractors, subcontractors and their affiliates. The legislation further provides that a copy of a contractor's or subcontractor's business registration is now a mandatory item that must be submitted under the Local Public Contracts Law. The requirements of the Act will be imposed beginning September 1, 2004.
New Jersey Revises Rules Regarding the Use of Corporate Net Operating Losses. For tax periods beginning in the 2004 and 2005 calendar years, a taxpayer subject to the New Jersey Corporation Business Tax may use net operating losses ("NOLs") to reduce its net income to 50% of what it would be without applying the NOLs. NOLs would be fully deductible again for tax periods beginning in calendar year 2006.
Business Retention and Relocation Assistance. A business may now be eligible to receive a grant of tax credits of up to $1,500 per retained full-time job. In order to be considered, the business must enter into an agreement with the State to (1) relocate a minimum of 250 full-time jobs from one location in New Jersey to a new location in New Jersey, and (2) maintain at least the same number of relocated jobs at the new location for 5 years. Additional incentives may be available if a business relocates a greater number of employees to certain urban areas.
An application must be submitted to the New Jersey Commerce and Economic Growth Commission at least 45 days prior to relocation. If the business fails to maintain the requisite number of employees or does not otherwise comply with the relocation agreement, the State may recapture the credits granted under the program.