A2207

An Act consolidating all categories of gross income for claiming of losses and allowing a 20 year net loss carry forward under the New Jersey gross income tax, amending N.J.S.54A:5-2 and repealing P.L.2011, c.60.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. N.J.S.54A:5-2 is amended to read as follows:

54A:5-2. Losses. a. Losses which occur within one category of gross income may be applied against other sources of gross income within [the same] another category of gross income during the taxable year [. However,] and a net loss in one category of gross income may [not] be applied against gross income in another category of gross income.

b. A taxpayer who sustains a net loss in a category of gross income set forth in N.J.S.54A:5-1, after applying that net loss against the other categories of gross income, may carry that loss forward, if necessary and in accordance with the terms and conditions prescribed by the director, for application as a deduction from gross income for each of the 20 taxable years following the taxable year in which the net loss occurs.

(cf: N.J.S.54A:5-2)

2. P.L.2011, c.60 (C.54A:3-9) is repealed.

3. This act shall take effect immediately and shall apply to taxable years beginning on or after January 1, 2018.

STATEMENT

The bill provides for the consolidation of all categories of income defined under the New Jersey gross income tax to allow taxpayers who generate income from different types of categories of income to offset gains from one type of income with losses from another, and permits net losses from the consolidated categories to be carried forward for a period of up to 20 taxable years.

As a result of the bill, for example, a taxpayer who generates a profit from ownership interest in a limited liability company may offset that gain with losses sustained as a sole proprietor, losses sustained from the sale of a patent or copyright, or losses sustained from an investment in a Subchapter S corporation, and if a net loss is unused, may carry it forward to deduct in future years.

Under current law, the “cross-netting” of gains or losses from one category of income to another and the “carry forward” of losses from one year to the next is prohibited, except for a limited cross-netting recently allowed for four categories of business-related income. Other than this limited consolidation, a loss may be used to offset a gain only if that loss and that gain fall within the same category of income, and a loss which occurs in one taxable year may not be carried back or forward and applied against past or future tax liabilities.

The inability to carry net losses from one year to the next along with the inability to cross-net gains or losses from one category to another, is unique to the State’s approach to imposing tax on income. New Jersey, unlike the federal government and states that base their tax on income on the federal definition of taxable income, impose tax on “gross income.”

New Jersey’s gross income tax has 16 separately defined categories of income. Each of these categories is a separate total, and for some, but not all, of the categories the costs and expenses of making that particular kind of income can be subtracted from that specific kind of income to calculate each of 16 small sums. New Jersey’s gross income is the total of those 16 sums, but the key difference between New Jersey taxable income and federal taxable income is that if for one of the 16 separate categories of income the “sum” is negative, or a loss, that loss is disregarded in calculating total New Jersey taxable income.

When the gross income tax was adopted in 1976, this approach to imposing tax on income was aimed at simplification. The law set aside the complex deductions, exclusions, carryforwards, carrybacks, phaseouts, credits, special allowances of the federal income tax, and required that 14 specific categories would be added up, a rate would be applied, and a calculation would be completed.

Since then, new forms of structuring businesses and investments have emerged, and more taxpayers have invested in more types of more diverse businesses entities and investment options. What was simple and straightforward has become inflexible and has served as a deterrent for growth and development. In creating a consolidated category of income, this bill removes the deterrent, and allows New Jersey’s gross income tax to keep pace with changes in the current marketplace.

The bill also repeals the recently enacted, and more limited, partial "cross-netting" of gains and losses from four of the gross income tax’s 16 separately defined categories of income consolidated into a single category of business-related income. This bill obviates the need for the more limited consolidated categories and net loss carryforward.