Pub. 18 2019-2020 Issue 1

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 2 , 2 0 1 9 14 new jersey auto retailer How Federal and New Jersey Tax Changes Affect Auto Dealers BY ROCHELLE KIMMINS The Tax Cuts and Jobs Act ( TCJA ), enacted in December 2017, contained sweeping changes to federal tax laws that impacted businesses and individuals. While simplifying tax reporting for many taxpayers, TCJA introduced a whole new level of complexity for small and large businesses and their owners, with some aspects of the law still unclarified and in need of technical corrections by the IRS. At the same time, New Jersey passed its own tax legislation, changing various corporate and individual tax provisions. As with all changes in tax law, certain industries and individuals experience greater or lesser benefits. New Jersey auto dealers experienced some unique tax effects on both their business and personal tax situations. Some dealers found they needed to make adjustments to optimize tax benefits or mitigate negative effects of the tax law changes. What follows is a guide to the major tax issues and planning challenges affecting New Jersey auto dealers. Choice of Business Entity TCJA provides a massive tax cut for corporations, lowering the rate to a flat 21 percent on all profits. In addition, the Alternative Minimum Tax of 20 percent is repealed for corporations. Although C corporations are subject to “double taxation,” this dramatic tax cut will make the corporate structure more attractive. But before sole proprietors and owners of pass-through entities rush to convert into C corporations, they will have to factor in the new 20 percent ( QBI ) deduction that will be allowed for owners of sole proprietorships, S corporations, partnerships and even stand-alone rental properties owned by individuals ( discussed below ). If you are starting a new business or considering a change in business entity type for an existing business, you will want to select the entity type with the best tax effect for your circumstances, including business succession and exit planning. New Jersey Impact: Corporate Taxes. While TCJA decreases federal corporate tax rates, New Jersey has imposed a surtax on corporations for tax years beginning on or after January 1, 2018, through December 31, 2021, based on the taxpayer’s allocated taxable net income to New Jersey. The surtax is not imposed on New Jersey S corporation or partnership tax returns. On top of the current corporate rate of 9 percent, the surtax is added only if the taxpayer’s allocated taxable net income is in excess of $1,000,000. The surtax rate var- ies depending on the tax year (2.5 percent for tax years beginning on or after January 1, 2018, through December 31,