Assembly Commerce, Economic Development and Agriculture Committee Statement to Assembly, No. 4455 (March 6, 2025)

Summary

Assembly Commerce, Economic Development and Agriculture Committee statement to the State of New Jersey Assembly on Assembly Bill No. 4455, dated March 6, 2025, reporting the bill favorably and with committee amendments. As amended, the bill allows a taxpayer to claim a deduction from New Jersey gross income for capital gains from the sale or exchange of qualified small business stock (QSBS) held for more than five years. It gives a maximum deduction of $10 million or 10 times the aggregate adjusted basis of QSBS where the in-State payroll percentage is 100 percent. The committee amendments add a requirement that at least 10 percent of the corporation's payroll be attributable to employment within the State, where the bill as introduced stated at least 80 percent.

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ASSEMBLY COMMERCE, ECONOMIC DEVELOPMENT AND
           AGRICULTURE COMMITTEE

                          STATEMENT TO

                     ASSEMBLY, No. 4455
                         with committee amendments



       STATE OF NEW JERSEY
                            DATED: MARCH 6, 2025

          The Assembly Commerce, Economic Development and
      Agriculture Committee reports favorably and with committee
      amendments Assembly Bill No. 4455.
          As amended, this bill allows a taxpayer to claim a deduction from
      New Jersey gross income for the capital gains earned from the sale or
      exchange of New Jersey qualified small business stock (QSBS) held
      for more than five years. The maximum deduction allowable under
      the bill depends on the percentage of the qualified small business’
      payroll, as measured by total dollar value, which is attributable to
      employment located within the State.
          If a taxpayer has capital gains for the taxable year from one or
      more dispositions of QSBS, the taxpayer would be allowed to claim a
      deduction equal to the greater of a specific dollar amount, or a multiple
      of the aggregate adjusted basis amount of the QSBS, based on a
      diminishing sliding scale. Specifically, the allowable deduction
      amounts would depend on the percentage of the corporation’s payroll,
      as measured by total dollar value, that is attributable to employment
      within this State. For example, if the percentage of the qualified small
      business’s payroll attributable to in-State employees is 100 percent, the
      maximum allowable deduction for capital gains from the sale or
      exchange of the QSBS would be $10 million or 10 times the aggregate
      adjusted basis of QSBS. In contrast, if the percentage of the qualified
      small business’s payroll attributable to in-State employees is at least
      10 percent but less than 20 percent, the maximum allowable deduction
      would be $1 million or the aggregate adjusted basis of QSBS.
          The maximum deduction of $10 million or 10 times the aggregate
      adjusted basis of QSBS is modeled on the federal capital gains
      exclusion allowed under section 1202 of the federal Internal Revenue
      Code.
          Under the bill, a QSBS is generally defined to include any stock
      that is originally issued by a C corporation on or after January 1, 2015,
      provided the corporation qualifies as a qualified small business as of
      the date of issuance, and the stock was acquired by the taxpayer at its
      original issue, not a secondary market. The bill also requires the
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QSBS to have been acquired in exchange for money or property, or as
compensation for services provided to the corporation.
     For an individual taxpayer to qualify for the special capital gains
treatment under the bill, the taxpayer is required to have held the
QSBS for at least five years. Specifically, the stock is required to be in
a qualified small business that is a domestic C corporation, and
remains a C corporation during substantially all of the time the
individual holds the stock, and which meets all of the following
criteria: (1) the aggregate gross assets of the corporation do not exceed
$50 million, both at all times after the effective date of the bill and
before the issuance of the stock; (2) the aggregate gross assets of the
corporation do not exceed $50 million as of the date the stock was
issued and immediately thereafter; and (3) the corporation has fewer
than 225 employees and at least 10 percent of the corporation’s
payroll, as measured by total dollar value, is attributable to
employment located within this State.
     Additionally, during substantially all of the time the stock is held,
at least 80 percent of the value of the corporation’s assets is required to
be used in the active conduct of one or more qualified businesses. As
under section 1202 of the federal Internal Revenue Code, the bill
provides that a gross income tax deduction may not be claimed for a
capital gain realized from the sale or exchange of a QSBS in a
business that is: a service business in the fields of health, law,
engineering, architecture, accounting, actuarial science, performing
arts, consulting, athletics, financial services, or brokerage services; a
banking, insurance, financing, leasing, investing, or similar business; a
farming business; a business of operating a hotel, motel, restaurant, or
similar business.
     If the individual taxpayer holds qualifying stock for at least five
years, then the taxpayer would be able to exclude the capital gains
made on the disposition of the stock, and thus pay no gross income on
the capital gains. The special exclusion of capital gains for qualified
stock that is held by “pass through entities,” including a partnership,
an “S” corporation, a regulated investment company, or a common
trust fund, that otherwise meet the requirements of this bill, is
available to the individual gross income taxpayers who hold interests
in those pass-through entities.

COMMITTEE AMENDMENTS:
    The committee amendments expand the definition of a “qualified
small business” to include, among other criteria, a requirement that the
corporation have at least 10 percent of the corporation’s payroll, as
measured by total dollar value, attributable to employment located
within this State. As introduced, the bill’s definition of a “qualified
small business” included a requirement that at least 80 percent of the
corporation’s payroll, as measured by total dollar value, be attributable
to employment located within the State.
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     The committee amendments also incorporate a schedule to specify
the maximum allowable deduction that a taxpayer may claim for the
gains derived from the sale or exchange of QSBS for a qualified small
business. The maximum allowable deduction to the taxpayer would be
equal to the greater of a specific dollar amount or a multiple of the
aggregate adjusted basis amount of the QSBS, as determined based on
a diminishing sliding scale depending on the percentage of the
corporation’s payroll attributable to in-State employment.
     The committee amendments further provide that, in the case of a
married individual filing a separate return, the maximum deduction
allowed under the bill would be the greater of: 50 percent of the
allowable dollar value, or 50 percent of the allowable aggregate
adjusted basis provided under the bill. As introduced, the maximum
deduction would have been $5 million.
     In addition, the committee amendments expand the scope of QSBS
for which the deduction may be claimed. As amended, a QSBS would
include any stock in a C corporation that was originally issued on or
after January 1, 2015, provided that all other eligibility requirements
are met. As introduced, a QSBS would have only included stock
issued on or after the effective date of the bill.
     The amendments also clarify that assets used in connection with
any future qualified trade or business would be treated as being used in
the active conduct of a qualified trade or business, regardless of
whether a corporation has any gross income from those activities at the
time. A corporation is required to satisfy the active business
requirements, among other criteria, in order for its stock to be
considered QSBS eligible for the deduction provided under the bill.
     Additionally, the amendments clarify that the deduction allowed
under the bill could only be claimed for taxable years beginning on or
after the effective date of the bill.
     The committee amendments also make technical changes to the
bill to reflect the repeal of section 936 of the federal Internal Revenue
Code (26 U.S.C. s.936), and make other corrections.


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