The New Jersey Division of Taxation today posted guidance on its website explaining how combined groups can fix the “trapped dividend exclusion” issue.
Specifically, if a combined group has a member with a zero New Jersey allocation factor, that member's dividend exclusion is not being subtracted from post-allocated income.
Under New Jersey law, corporation business tax (CBT) taxpayers are allowed an exclusion for certain dividends received in computing entire net income, which is then subject to apportionment (termed “allocation” in New Jersey).
The Division’s form for computing and reporting the dividend exclusion—Schedule R on the 2019 Form CBT-100U—treats the exclusion as a post-apportionment deduction. As such, the deduction applies only to combined group members that have New Jersey apportionment. This means that a combined group may have dividends included in entire net income but may not be allowed an exclusion because the group member that brought the dividends into the group’s entire net income does not have New Jersey nexus and/or apportionment factors. Hence the “trapped dividend exclusion.”
According to the guidance—Notice: CBT-100U Schedule R—the following adjustment must be made when calculating the allocated dividend exclusion on the 2019 Form CBT-100U:
If Schedule R (Dividend Exclusion), Part I is applicable to the combined group, then for Part I, line 1(a) each member must enter the total dividends and deemed dividends reported, and not eliminated on Schedule A, of all the members of the combined group. Each member will compute the dividend exclusion as though it were a group level exclusion in each member's column. Each member of the group will continue to use their respective allocation factor from Schedule J.
If Schedule R (Dividend Exclusion), Part III is applicable to the combined group, then for Part III, line 1(a) each member must enter the total dividends and deemed dividends reported, and not eliminated on Schedule A, of all the members of the combined group. Each member will compute the dividend exclusion as though it were a group level exclusion in each member's column. Each member of the group will continue to use their respective allocation factor from Schedule J.
[Emphasis in original.]
If a combined group is affected by this "trapped dividend exclusion" scenario and has already filed the 2019 return, the managerial member may amend the group's 2019 Form CBT-100U and Schedule R (as described above).
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