New Jersey Enacts Fiscal 2027 Budget, Temporarily Limits NOL Use

On June 30, New Jersey Gov. Mikie Sherrill signed the state’s fiscal year 2027 budget into law. As part of the budget package, A 5322 (P.L. 2026, c.21) imposes temporary limitations on the use of net operating loss (NOL) deductions for purposes of the New Jersey corporation business tax (NJ CBT). 

The legislation will affect many NJ CBT taxpayers by limiting the amount of NOL deductions that can be used during specified future privilege periods.

In enacting the new rules, New Jersey joins a growing number of states that impose temporary limitations on corporate NOL use as a revenue-raising measure.

NOL Provisions

Background

For NJ CBT purposes, loss carryforwards generally fall into two categories:

• Prior NOLs, which generally consist of loss carryforwards generated in privilege periods ending before July 31, 2019, and subsequently converted from a pre-apportionment basis to a post-apportionment basis; and
• NOL deductions, which generally consist of loss carryforwards generated in privilege periods ending after the transition to New Jersey’s current post-apportionment regime, beginning in privilege periods ending on or after July 31, 2019.

Limitation Rules

For privilege periods ending on or after July 31, 2026, and before July 31, 2030, taxpayers cannot claim more than $1 million of NOL deductions in the aggregate. The limitation applies collectively to the use of prior NOLs and NOL deductions and is referred to herein as the “deduction cap.” Also, taxpayers must exhaust prior NOLs before using any NOL deductions.

For example, a taxpayer that has $600K of prior NOLs and $600K of NOL deductions cannot use the entire balance in an applicable year because of the deduction cap. Use in a tax year is limited to $600K of prior NOLs and $400K of NOL deductions, leaving a $200K NOL carryforward.

For members of an NJ CBT unitary combined filing, the deduction cap applies to the combined group as a whole and not to each individual member.  

For taxpayers with a short privilege period, the deduction cap is prorated based on the number of months in the privilege period. For example, a three-month privilege period would be subject to a $250,000 limitation.

For privilege periods ending on or after July 31, 2030, and before July 31, 2032, the $1 million deduction cap does not apply. However, NOL deductions used during those periods cannot reduce allocated entire net income by more than 75%. 

Before enactment of A 5322, New Jersey generally allowed NOL deductions to offset up to 80% of taxable income (which remains in place during the deduction cap privilege periods).

Extended Carryforward Period and Estimated Tax Relief

Recognizing that the deduction cap might defer the use of existing NOLs, the legislation extends the carryforward period for affected losses. Taxpayers whose NOL deductions are reduced or disallowed as a result of the new limitations are allowed an additional six privilege periods to use the affected carryforwards.

The legislation also provides relief from estimated tax underpayment interest and penalties when:

• The installment payment is due after December 31, 2025, and before January 1, 2027; and
• The underpayment results from the enactment of the deduction cap.

Miscellaneous

The deduction cap does not apply to public utilities, including transportation services, pipelines, utilities (gas, electricity, water, telecommunications), and waste collection and disposal systems.

Because of New Jersey’s corporate transit fee, cash tax considerations might be more pressing for privilege periods beginning through December 31, 2028. The fee imposes an additional 2.5% net income tax on businesses with NJ CBT allocable net income of over $10 million (see our previous Alert, New Jersey Enacts Corporate Transit Fee, on the corporate transit fee).

Impact on Other New Jersey Taxes

The fiscal 2027 budget does not make significant changes to New Jersey sales and use tax provisions.

For New Jersey gross income tax purposes, the child tax credit will increase by 25% — for example, from $1,000 to $1,250 — across all income tiers for tax years 2026 through 2028.

The budget also includes additional property tax relief measures, primarily benefiting senior citizens through enhancements to programs such as Stay NJ.