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

Summary

An Assembly Commerce, Economic Development and Agriculture Committee statement to Assembly, No. 4455, State of New Jersey, dated March 6, 2025, reporting the bill favorably with committee amendments. The bill allows a deduction from New Jersey gross income for capital gains from the sale or exchange of New Jersey qualified small business stock (QSBS) owned for more than five years. The maximum deduction depends on the share of the business's payroll attributable to in-State employment: at 100 percent it is $10 million or 10 times the aggregate adjusted basis, modeled on section 1202 of the federal Internal Revenue Code. A qualified small business must have aggregate gross assets not exceeding $50 million and fewer than 225 employees, among other criteria.

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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 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.

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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