NJCPA Legislative Update
Below are highlights of key legislation the NJCPA is tracking. If you have any questions, contact Jeff Kaszerman, NJCPA Government Relations Director, at 973-226-4494 x210, or firstname.lastname@example.org.
Appeal Bond Caps, SUPPORT, A1055
The NJCPA and the NJ Civil Justice Institute support this legislation which limits the amount of appeal bond in civil actions to $50 million. When a defendant loses a case at trial and the plaintiff receives a monetary award, state law typically allows the plaintiff to collect that money as soon as the trial court proceedings are completed. In many cases, however, the defendant will appeal to a higher court seeking reversal of the trial court’s determination. Under current law In New Jersey, the defendant must post a bond for the full amount of the award while the appeal is pending.
With awards now reaching hundreds of millions of dollars, it is often financially ruinous for a defendant to post such a large bond and this de facto inability to appeal is used by plaintiff attorneys as a club against defendants. Defendants are forced to settle cases even though they are confident an unfair award would be lowered or dismissed at the appellate level. This legislation will help ensure that the appellate level remains open to defendants who are hit with large damages at the trial level.
The CPA profession’s concern about the impact of having to post huge appeal bonds is not just theoretical. In the last few years there have been many multi-million judgments against CPA firms. For example, this occurred in 2007 in Florida in the case of Banco Espirito v. BDO International, where the CPA firm BDO was held liable for $522 million. If Florida had not enacted legislation similar to S480/A2473 in the previous year, BDO would probably not have been able to post a bond of $522 million and would probably have gone out of business. That would have put the 2,700 people who work at BDO out of work. Instead, BDO was able to appeal and the case was eventually dismissed.
Reducing NJ’s Estate/Inheritance Taxes, SUPPORT
The NJCPA has joined with other pro business and taxpayer groups in supporting “death tax reform.” There are more than a dozen bills pending in the state legislature that would reduce or eliminate the state’s estate and inheritance taxes.
New Jersey has the most onerous death taxes in the country, which are forcing growing numbers of new Jerseyans to leave for other states where there are either no death taxes or the burden is much lighter. New Jersey is only one of two states that has both an estate and inheritance tax and, unlike most states, NJ never hiked its $675,000 exclusion to match the federal exclusion of $5.1 million. Most recently New York reduced its estate tax by enacting legislation that will phase in an estate tax exemption to match the federal exemption, tempting even more New Jerseyans to flee the state.
A January 2014 Regent Atlantic study “Exodus on the Parkway: Are taxes Driving Wealthy Residents out of New Jersey” noted that in just one year alone, from 2009 to 2010, New Jersey lost over $1 billion in taxable adjustable gross income because it suffered a net loss of 11,167 tax filers who left for FL, PA, NC, MD and VA.
New Jersey’s estate and inheritance taxes together bring in about $700 million to the state coffers annually and some lawmakers are hesitant about passing reforms because they believe the state can’t afford the lost revenues. Business and taxpayer groups counter that in the long run there would be a net gain in revenues as less money, capital and investment would leave New Jersey. This would generate more economic activity and taxable income.
Professional Malpractice Reform, SUPPORT, A1254
The NJCPA supports this bill, which requires that civil actions alleging professional malpractice be brought within two years, as is the case with civil actions generally. Currently, the statute of limitations in these professional malpractice cases is six years. The bill sponsor is Assembly Speaker Prieto.
Creation of Task Force to Study Regulating Tax Preparers, OPPOSE, SJR61.
Legislation was introduced in October 2014 to establish a Task Force to make recommendations concerning the regulation of tax preparers. The Task Force would be required to issue a report that “determines the appropriate scope of a program for regulating commercial tax return preparers; addresses the appropriate qualifications, including, but not limited to, minimum educational qualifications and continuing education requirements for commercial tax return preparers; and considers any other matters the task force determines to be necessary or appropriate.”
Although it might seem like a straight forward issue, the subject of regulating tax preparers on a state level is actually quite complicated and has a number of pitfalls. For example, the IRS recently launched a federal voluntary program to regulate tax preparers and the potential for marketplace confusion is immense. Will taxpayers know the differences between classes of preparers? Furthermore, the American Institute of CPAs recently went on record in opposition to state regulation of tax preparers.
While the NJCPA is opposed to this bill, it does support various regulatory options outlined by the AICPA that would enhance ethical behavior and competency requirements for non CPA tax preparers. The NJCPA also supported previous legislation enacted into law that gave the NJ Division of Banking and Insurance the power to protect consumers from certain unethical practices conducted by some unscrupulous tax preparers.
Mandatory firm rotation for external governmental auditors, OPPOSE
In August 2008 the NJ comptroller released a report criticizing firms that do external government audits for local government units in NJ. Amongst his recommendations was mandating audit firm rotation for local government bodies every 10 years. Since then, there have been several other legislative and regulatory proposals to mandate audit firm rotation. The NJCPA successfully opposed all these initiatives.
Although the NJCPA generally supported most of the reforms called for in the Comptroller’s report, we are strongly opposed to mandatory audit firm rotation. Our opposition to this as well as recommendations for real reforms that will strengthen the audit process for government units can be found in our 2010 white paper NJCPA RECOMMENDATIONS FOR REFORMING THE EXTERNAL AUDIT PROCESS FOR LOCAL GOVERNMENT ENTITIES IN NJ. Further recommendations are to be found in our 2014 correspondence with Assemblywoman Nancy Munoz in which we put forth comprehensive recommendations. In 2013 Assemblywoman Munoz had introduced legislation requiring mandatory firm rotation, but she withdrew it at our request. She is now considering introducing legislation that may include our recommendations, which focus on mandating audit committees and financial/budgeting education for elected local government board members.
While mandatory rotation is appealing on the face of it, in reality it puts a governmental entity at a greater risk of fraud going undetected, can easily lead to lower audit quality and is very costly. Requiring mandatory rotation leaves the new audit firm with significant startup costs and a steep learning curve, the cost of which will be passed on to taxpayers. It also leaves the door open to more fraud and waste, as the new auditors are less likely to spot suspicious transactions due to the knowledge gap they must overcome in the beginning years of taking on a new client. The NJCPA strongly believes that mandatory rotation is counterproductive and will harm efforts to reform the governmental audit process in NJ.
It is also worth noting that audit firm rotation was specifically NOT included in the Sarbanes-Oxley federal accounting reform legislation and a 2003 United States Government Accountability Office report on the issue stated that the “GAO believes that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and the loss of institutional knowledge of the public company’s previous auditor of record…”
Revising financial reporting requirements for charitable organizations, MONITORING, A3668
This bill amends New Jersey’s Charitable Registration and Investigation Act by increasing the thresholds of gross revenue amounts received by charitable organizations that determine their annual financial reporting requirements with the Attorney General’s office. Under the bill, a charitable organization operating or soliciting within the State which receives annual gross revenue in excess of $1,000,000 must file with its annual financial report, a financial statement which has been audited by an independent certified public accountant. Currently, the threshold is $500,000.
Changing due dates for wage reports required by NJ Dept of Labor, SEEKING AMENDMENT, A3156
This bill shortens the time period in which certain employers are required to file reports on wages earned by their employees, and changes the date those reports are required to be filed with the NJ Department of Labor and Workforce Development. The purpose of this bill is to provide a more timely system for the reporting of wages to the department to ensure that unemployed individuals are collecting an accurate level of benefits and to assist the department in identifying individuals who may be collecting benefits for which they are not eligible.
The NJCPA has requested that the sponsor of the bill amend it to make it easier for CPAs with small employer clients to provide the information required. We are requesting that the due date for filing the wage report for small employers be changed from 20 days after the quarter ends to 30 days after the quarter. The 30 day requirement is what is currently in place.
The reason for the amendment is because many small employers, who do not use payroll companies, require their CPA (very often a sole practitioner or partner in a small firm) to file the wage report information that is currently due on the 30th day after the end of the quarter. In addition to this deadline for the wage report information, the CPA typically also has to contend with his client’s sales tax returns due on the 20th of the month and payroll returns due on the 30th and 31st. It would be a severe administrative burden to the CPA to require the wage report information on the 20th instead of the 30th.
Penalizing “Inverted Domestic Corporations”, MONITORING, A3624/A3681 ACS, A3678, S2361
These bills, which pro business groups strongly oppose, would penalize “inverted domestic corporations.” The bills define an inverted domestic corporation as a business or parent corporation incorporated or previously incorporated in the United States that became incorporated in a foreign country or that became a subsidiary of a corporation that is incorporated in a foreign country, primarily for the purpose of avoiding United States taxes. Under the bills, the companies would be prohibited from getting state contracts and certain development subsidies.
The State Treasurer would have sole authority in determining if a company is an inverted domestic corporation. The determination would be made based on several factors, including: whether the change in corporate organization has substantially reduced the corporation’s federal tax liability; whether the corporation has the majority of its operations in the US; whether the corporation is at least half-owned by US shareholders; and any other factors the Treasurer deems appropriate. Corporations barred from performing federal contracts because it was deemed to be an inverted domestic corporation under federal law are automatically deemed to be an inverted company under these bills.
The legislation poses several concerns to the business community. The vague definition for inverted domestic corporations could be broadly applied and may impact existing state contracts if the State Treasurer determines a company to be an inverter. Additionally, the bill does not specify any means for a company to appeal a determination by the State Treasurer.
Changing due date of NJ transfer inheritance tax payment, SUPPORT, A2026
This bill realigns the NJ transfer inheritance tax payment due date to coincide with the payment due dates for the State and federal estate taxes. The purpose of this bill is to simplify New Jersey’s inheritance tax filing procedures. It was introduced at the request of the NJCPA State Tax Interest Group.
Tax relief for Madoff-type fraud victims, SUPPORT, A1748, S1139
This bill provides relief for New Jersey gross income taxpayers who suffer monetary losses as a result of certain investment arrangements that are discovered to be criminally fraudulent.
Under the bill, a taxpayer who sustains a qualified loss as a result of an investment in an investment scheme that is discovered to be criminally fraudulent and who is eligible to claim that loss as a theft loss deduction for federal income tax purposes may elect to deduct, from the taxpayer’s New Jersey gross income, certain investment income reported by the taxpayer in prior taxable years. Specifically, the bill permits taxpayers to deduct interest and dividends, capital gains or any other category of income that is reported as gross income and directly attributable to the fraudulent arrangement determined to be the source of the theft loss deduction.
The provisions of the bill stipulate that the deduction is limited to qualified losses sustained in calendar year 2008, 2009 or 2010, and may only be applied against investment income reported in each of the three taxable years prior to the year the qualified loss is discovered. The amount of the deduction excludes any income withdrawn, reimbursed, or otherwise received as cash, or as a cash equivalent, from the investment prior to discovery.
Business Court Bill, SUPPORT, S738, A287
This bill establishes a Business Court as a court of limited jurisdiction very similar to the current Tax Court. The Business Court would have jurisdiction with respect to business and commercial disputes involving contracts; the Uniform Commercial Code; banking; insurance; commodities; securities; corporations; non-profit corporations; partnerships; limited liability entities and associations; business trusts; competition among businesses; business reorganizations; dispositions of businesses; business combinations; shareholder, partner and member disputes; intellectual property matters; the termination of services to a business or an agreement not to compete; employment agreements with an executive officer or manager; and other commercial disputes as provided by the court rules. The Business Court would also hear certain private actions authorized under federal law which may be heard in State court pursuant to which a federal agency regulates certain matters.
This Business Court would help to ensure that there are state judges who have the experience and expertise to handle complicated business cases. The bill is supported by the NJBIA, State Bar Association, and many other pro business groups.
Hurricane Sandy Tax Relief Act of 2013, SUPPORT, HR2137 (sponsor Congressman Pascrell)
The NJCPA strongly supports this federal legislation that would amend the Internal Revenue Code to provide tax benefits for individuals and businesses affected by Hurricane Sandy. The AICPA also supports the bill. Benefits in the bill include:
an exemption from the gross income limitation for deducting casualty losses attributable to Hurricane Sandy;
- expensing allowances for Hurricane Sandy disaster expenses, disaster assistance property, and environmental remediation expenses;
- treatment of losses attributable to Hurricane Sandy as net operating losses;
- suspension of mortgage revenue bond requirements for residences located in the Hurricane Sandy disaster area;
- an increased charitable tax deduction for Hurricane Sandy disaster relief contributions;
- a special allocation of the new markets tax credit for investments in community development entities serving the disaster area;
- special adjustments to the earned income tax credit and the child tax credit for individuals living in the disaster area;
- a work opportunity tax credit for hiring employees residing in the Hurricane Sandy disaster area;
- authorization for issuance of Hurricane Sandy bonds to finance disaster relief projects;
- an additional allocation of low-income housing credits in states affected by Hurricane Sandy; and
- an exemption from the 10% penalty for premature distributions from a retirement plan to individuals residing in the Hurricane Sandy disaster area.
The bill is currently pending in the House Ways and Means Committee.