LEGISLATIVE FISCAL ESTIMATE
[Second Reprint]
SENATE, No. 1422
STATE OF NEW JERSEY
221st LEGISLATURE
DATED: MARCH 21, 2024
SUMMARY
Synopsis: Allows taxpayers to utilize alternative method of depreciation of
certain expenditures in connection with construction of new affordable
housing developments.
Type of Impact: Annual State revenue loss to the State General Fund and Property Tax
Relief Fund.
Agencies Affected: Department of the Treasury.
Office of Legislative Services Estimate
Fiscal Impact First Year of Implementation Thereafter
State Revenue Loss $1.2 million to $2.3 million Indeterminate
 The Office of Legislative Services (OLS) projects that the bill will result in annual State
revenue losses incurred by the General Fund and Property Tax Relief Fund in the range of $1.2
million to $2.3 million in the first year of implementation.
 State revenue losses thereafter will be dependent on several factors that may influence the
amount of depreciation that is deducted from income using the new method provided by the
bill, including the pace of affordable housing construction, the value of new affordable housing
developments, and whether an affordable housing development has received an affordable
housing subsidy or a property tax abatement or exemption.
 The alternate method of depreciating the value of new housing construction under the bill
would allow taxpayers to accelerate the depreciation of property sooner than is the case under
current law, and potentially claim larger depreciation deductions, thereby lowering the amount
of income that is subject to taxation. This would, in turn, reduce State revenue collections
from the corporation business tax and gross income tax.
 There are several factors, such as the percentage of affordable housing units in an affordable
housing development, and differences in the methods of calculating depreciation under current
law and the bill, that may cause State revenue losses to be higher or lower than anticipated in
this estimate.
Office of Legislative Services Legislative Budget and Finance Office
State House Annex Phone (609) 847-3105
P.O. Box 068 Fax (609) 777-2442
Trenton, New Jersey 08625 www.njleg.state.nj.us
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BILL DESCRIPTION
This bill allows a taxpayer to claim a depreciation deduction under the corporation business
tax and the gross income tax for eligible property expenditures incurred by the taxpayer for the
construction of a new affordable housing development owned by the taxpayer. The bill permits a
taxpayer to claim the deduction over a 10-year period.
To calculate the percentage of eligible property expenditures that may be depreciated, the
taxpayer would be required to apply the following formula: 2 times (the number of affordable
housing units in the development divided by the total number of housing units in the development).
The bill defines an “affordable housing development” as a development: (1) for which
construction commences on or after the effective date of the bill; (2) for which taxes are not abated
or exempted pursuant to the Long Term Tax Exemption Law, P.L.1991, c.431, or does not receive
an affordable housing subsidy for the construction of low- and moderate-income housing; and (3)
that includes one or more units of housing, at least 20 percent of which qualify as affordable
housing, a defined in the bill.
The bill allows a depreciation deduction to be claimed for affordable housing developments
placed in service during any tax year or privilege period beginning January 1, 2025, or thereafter.
FISCAL ANALYSIS
EXECUTIVE BRANCH
None received.
OFFICE OF LEGISLATIVE SERVICES
The OLS projects that the bill will result in annual State revenue losses incurred by the General
Fund and Property Tax Relief Fund in the range of $1.2 million to $2.3 million in the first year of
implementation. State revenue losses thereafter will be dependent on several factors that may
influence the amount of depreciation that is deducted from income using the new method provided
by the bill, including the pace of affordable housing construction, the value of new affordable
housing developments, and the percentage of affordable housing units in each development. This
estimate has been calculated using data published by the Department of Community Affairs in the
New Jersey Construction Reporter and is based on certain assumptions regarding housing
construction activity.
Deprecation is an annual deduction from income that allows a taxpayer to recover the cost or
other basis of certain property over the time that they use the property. Except as otherwise
provided under current law, New Jersey follows the rules for depreciation set forth in the federal
Internal Revenue Code. The approaches used to depreciate the value of different types of property
and determine the amount a taxpayer may deduct from income due to the decline in a property’s
value are prescribed by the Internal Revenue Code. Taxpayers may claim depreciation as a
deduction from income, thereby lowering their State and federal tax liabilities.
Although the Internal Revenue Code does not specifically reference affordable housing, it does
establish a method used to determine depreciation for residential rental property (defined as any
building or structure if 80 percent or more of the gross rental income from such building or
structure for the taxable year is rental income from dwelling units). The code requires residential
rental property to be depreciated over a period of 27.5 years using a straight-line method of
depreciation. The straight-line method of depreciation allows a taxpayer to deduct the same
amount of depreciation each year over the useful life of the property. Residential real property
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depreciates by about 3.636 percent annually. The bill establishes an alternate formula for
calculating the amount that may be depreciated for affordable housing developments and requires
that amount to be depreciated over a period of 10 years. Under this new formula, the amount of
depreciation is based on the number of affordable housing units in a development.
The Construction Reporter contains statistics on the construction activity in New Jersey from
data submitted by construction officials who administer the State Uniform Construction Code.
According to the Construction Reporter, about 30,900 building permits for the construction of new
housing units were issued in 2022. The estimated cost of construction of these new units was
approximately $5.74 billion. Under the bill, a development qualifies as an affordable housing
development if 20 percent of the housing units are affordable housing. Thus, if all 30,900 new
housing units authorized by building permit for new construction in 2022 were located in
affordable housing developments, then at least 6,180 units would have to qualify as affordable
housing in order for the taxpayer to utilize the new depreciation method.
The bill provides that the amount to be depreciated would use the following formula: two
times the quotient of the number of affordable housing units in the development, divided by the
number of housing units in the development. Applying this formula to the 2022 housing unit data
yields a product of 40 percent [(6,180/30,898) x 2 = .40]. The total amount to be depreciated is
determined by multiplying the total amount of eligible property expenditures by the depreciation
percentage. The OLS assumes that the $5.74 billion in construction costs for new housing units
would also qualify as eligible property expenditures. Multiplying that amount by the depreciation
percentage yields a depreciation amount of $2.3 billion over 10 years, or $230 million per year.
As noted above, the current depreciation method provides that real property depreciate by 3.636
percent annually over 27.5 years. If all 30,900 new housing units were to qualify as residential
real property and the $5.74 billion in associated construction costs were depreciable, then
taxpayers would currently be able to deduct about $208.7 million annually. In each circumstance,
the impact of the depreciation on State revenue collections would be proportional to the marginal
income tax rate of the entity claiming the deduction.
A taxpayer subject to the bill’s provisions would be subject to corporation business tax, gross
income tax, or the pass-through business alternative income tax, depending on the structure of the
taxpayer’s business. However, information regarding the corporate structure of those taxpayers
most likely to use the alternate depreciation method is not available. For purposes of this estimate,
the OLS assumes that those taxpayers are subject to State tax rates ranging from 5.675 percent to
10.9 percent. The State revenue loss is equal to the difference between each taxpayer’s tax liability
after accounting for the amounts that would be deducted from income using each method of
depreciation. Applying these rates to the estimated amounts of depreciation in the first year of the
bill’s implementation ($230 million and $208.74 million) yields projected State revenue losses of
$1.2 million to $2.3 million.
The OLS notes that the bill does not allow a taxpayer to employ the alternate depreciation
formula if the property tax liability for an affordable housing development has received a property
tax abatement or exemption or an affordable housing subsidy. The bill broadly defines an
affordable housing subsidy as financing that is intended to support the development of affordable
housing and provided by the Department of Community Affairs, New Jersey Housing and
Mortgage and Finance Agency, or a municipal affordable housing trust fund. This restriction will
limit the State’s revenue losses because it reduces the number of affordable housing developments
for which the alternate deprecation may be utilized. Information regarding the number of
affordable housing developments that have received an affordable housing subsidy is not readily
available.
However, the OLS notes that there are additional factors that may cause actual State revenue
losses to differ from these amounts. First, this estimate presumes that 20 percent of new housing
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units will be affordable housing. This is the minimum amount required for a taxpayer to be allowed
to use the alternate depreciation method under the provisions of the bill. If an affordable housing
development contains a greater proportion of affordable housing, a taxpayer would be able to
depreciate a higher amount of eligible property expenditures, thereby increasing the amount they
may deduct from income and the State’s revenue losses. Second, this estimate is based on a dollar
amount of construction, $5.74 billion, indicated in the Construction Reporter. The Construction
Reporter defines the “dollar amount of construction” as the estimated cost of work as reported by
a permit applicant to the construction official. There are likely construction costs reported on a
permit application that are not depreciable, and therefore, deductible from income. In these
instances, the State revenue loss would be lower than anticipated. Third, this estimate assumes
that all housing units authorized for construction in 2022 were part of an affordable housing
development, as defined in the bill. As such, this estimate may overstate the total amount of
eligible property expenditures that may be subject to the depreciation allowance. Lastly, federal
Internal Revenue Service guidance provides that a taxpayer may deduct depreciation only on that
part of their property used for rental purposes. The bill allows a taxpayer to deduct depreciable
costs for eligible capital expenditures associated with the construction of an entire housing
development, thereby permitting a deduction for depreciation for a potentially larger amount of
expenditures.
The application of the new formula may cause certain taxpayers to claim the deduction for
depreciation over a shorter time-frame, thereby resulting in higher amounts of taxable income in
the years after its application. The new formula may also incentivize some taxpayers to make
deductible investments in the construction of new affordable housing developments they may not
otherwise make. To the extent that these factors might contribute to higher business earnings and
increase economic activity overall, State tax collections may increase by an indeterminate amount.
Section: Revenue, Finance, and Appropriations
Analyst: Joseph A. Pezzulo
Section Chief
Approved: Thomas Koenig
Legislative Budget and Finance Officer
This legislative fiscal estimate has been produced by the Office of Legislative Services due to the
failure of the Executive Branch to respond to our request for a fiscal note.
This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).