Take Advantage of R&D Tax Credits, NOL Sales, Other Growth-Oriented Programs
When planning to launch a tech start-up on the east coast, many entrepreneurs automatically think Boston’s 128 corridor or New York City’s Silicon Alley. We propose that from a business and taxation perspective, there’s another strategic place to consider for starting and growing a technology company: New Jersey.
Before describing some of the rich arrays of New Jersey tax incentives that make it a start-up locale superior to other tech hubs in the region, let us first note that some companies we speak with haven’t considered New Jersey because they perceive it as, “a world away from the action.” In reality, it’s right next door to New York and all of its advantages – including a rich talent pool, while also being just a bridge away from Philadelphia.
In fact, after 9-11 many companies relocated from lower Manhattan to Jersey City, which has a growing tech sector – and is only a ten-minute train ride from midtown. Newark, 15 minutes from New York City, is also attracting tech firms. North Brunswick, the location of the Commercialization Center for Innovative Technology (CCIT) and Somerville, home to major pharma companies and related tech firms, are each an hour’s ride to New York City. Camden, across the Benjamin Franklin Bridge from center city Philadelphia, is the location of another incubator. Beyond proximity, the available business and tax incentives make New Jersey a great choice.
Incentives Help Solve Start-Up Financial Issues
One of the primary issues for start-up companies is raising capital. Luckily, New Jersey has several incentive programs that simplify fundraising and capital preservation.
- The R&D Tax Credit – New Jersey is one of 40 states that amplify the federal R&D tax credit by applying it to state taxes as well. Qualified tech firms are allowed a credit against the state corporation business tax for qualified expenditures with respect to research conducted in New Jersey. The allowable credit equals 10% of the excess of the qualified research expense for the fiscal or calendar year over a base amount and 10% of the basic research payments. This program is managed by the Department of Taxation.
- The Technology Business Tax Certificate Transfer Program – This program enables qualified, unprofitable NJ-based technology or biotechnology companies with fewer than 225 US employees (including parent company and all subsidiaries) to sell a percentage of net operating losses (NOL) and research and development tax credits to unrelated profitable corporations. This allows early-stage companies that are building toward profitability to get back a percentage of their business investment.
- The Angel Investor Tax Credit – This program is intended to make your firm more attractive to early-stage investors. All investors in a qualifying New Jersey emerging technology business may benefit from a tax credit equal to 10% of the qualified investment up to a maximum of $500,000 for each qualified investment.
- Innovation Zones – Newark, Greater New Brunswick and Camden are considered Innovation Zones and companies that locate in one of those cities and are approved for the NOL program draw from a separate pool of incentive dollars.
Structure Your Start-up for Maximum Benefit
Some upfront understanding of available incentives and the rules regulating them can help you to build your company so that it can take advantage of all programs for which it can qualify.
For example, the New Jersey R&D tax credit can be taken by qualifying companies structured as C-corporations, and to a lesser degree by S-corporations, which cannot pass through credits to individual investors. The credit is not available to partnerships and other pass-through entities.
The strategic decision is to structure your New Jersey entity as a C-corp.
Depending on your company’s situation, there may also be advantages to locating in specified enterprise zones. For example, the Garden State Growth Zone Business Lease Incentive offers a reimbursement of 15 percent of annual lease payments for the first two years of a minimum five-year lease, so long as the space is between 500 and 5,000 square feet of new or additional market-rate, a first-floor office, industrial or retail space. There are other real estate-related incentives.
New Jersey is highly transparent about the credits and other incentives it grants to businesses. On the New Jersey Economic Development Authority (NJEDA) website, it publishes the amounts by company and offers other information that allows a potential applicant to see what companies similar to theirs have received. This is essential information for overall financial planning for a launch.
Strategic structuring and an advanced understanding of the incentives for which they could qualify allows entrepreneurs to bundle programs together from the very early stages of the business. This planning strategy has allowed some PM Business Advisors’ clients to recoup up to a third of their investments. They can put these interest-free monies back into the company to support growth.
As your New Jersey company gets to the next stage and seeks to attract venture funding to build management infrastructure and scale growth, there are additional programs that can help. Some programs may have location-specific benefits. We recommend assessing available programs before you launch your company and factor their requirements into your location decision.
One Company’s New Jersey Strategy
Founded in 2011, Gadget Software is a technology company that builds and operates a mobile publishing platform that allows content publishers to easily recreate and publish, or to author their content as native mobile applications. Its Gadget ONE™ Content Services Platform transforms PDF manuals into its vPub™ Smart Manuals for touchscreens. This solution leverages four key technologies to enable users to more quickly locate and engage with information.
In 2015, the company made a strategic relocation from the Boston tech corridor to the Newark, New Jersey Innovation Zone. Its CPAs were aware of New Jersey tax incentives and introduced the firm to PM Business Advisors’ specialized services.
According to Gadget Software Chairman and CEO Rob Soni, “Any young firm needs as much cash as possible. We were enthusiastic about taking advantage of tax incentives that provide us funds with unrestricted use and without having to dilute ownership.
“It’s a complex process and we can’t say that we would have been successful without PM Business Advisors’ expert guidance. In 2018 we applied and were approved for the research tax credit and the NOL sales program, combining several years of losses. Locating in New Jersey has proved to be a significant advantage.”
Does Your Company Qualify?
Throughout this post we’ve used the word ‘qualify’ numerous times. Each program has qualifiers. Some are related to a specific industry sector, some to location, some to company size by number of employees. It behooves any company considering a launch or relocation to New Jersey – or any state for that matter – to seek expert help to expand its strategic vision.
The NJEDA www.njeda.com/ is a great resource for getting a thorough understanding of all of its programs. You’ll also do well to speak with a tax and business advisor to apply programs to your go-to-market strategy and growth plans.
You may find two recent posts here helpful to a consideration of New Jersey. The first is an update on the New Jersey tax credit program. The second is about how to know if you qualify for the R&D tax credit.