Part of a Series on State and Local R&D Tax Credits.
Many states offer tax credits from research and development spend that complement the Federal R&D Tax Credit program. However, each of these programs have unique aspects. This article is apart of a tax technical series that will explore the more popular programs and outline the practicable benefits and pitfalls of each. Each article features one state program.
The New Jersey R&D Tax Credit Program
In general, corporate entities are allowed a credit against the corporation business tax for qualified expenditures with respect to research conducted in New Jersey for each taxable year. Qualified Research Expenditures (QRE) are related to activities such as scientific experimentation or engineering that meet a four-part test and encourage the development of a new or improved products, processes, techniques, or computer software programs held for sale, lease or license, and used by the taxpayer in a trade or business.
The amount of the credit allowed 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. It is only available to C corporations and S corporations — not partnerships and other pass-through entities. A New Jersey S Corporation’s credits are limited to its New Jersey corporation tax liability and pass-through of the credit to the individual shareholders isn’t permitted. Noting New Jersey corporations, including S Corporations, must pay a minimum tax that is based on New Jersey gross receipts.
Unused research and development credits may be carried forward for up to seven years. However, qualified, unprofitable NJ-based companies in the technology or biotechnology sector can sell a percentage of their R&D tax credits and net operating losses (NOL) to profitable corporations. New Jersey sets aside $60 million annually for this program, $10 million of which is set aside specifically for businesses that are in innovation zones with any remaining balance returned to the general pool. Applications for this program are due every year by the end of the day on June 30th.
New Jersey is a US hotspot for technology companies, especially in the life-science and pharma industries, so it’s no surprise that they offer a generous credit. In addition, the ability for unprofitable technology companies to sell their unused credits and NOLs makes New Jersey a very attractive spot for start-ups. Unfortunately, the exclusion of LLCs and Partnerships puts a damper on this program. Companies should consider this fact carefully when forming start-ups that will have significant R&D spend in New Jersey.
New Jersey R&D Tax Law Change
On July 1, 2018, New Jersey Governor Phil Murphy signed into law Assembly Bill 4202. Several key aspects of the bill updated the way companies can calculate their R&D tax credit. First, the law was updated to refer to the most recent version of IRC section 41 that was in effect as of June 30, 1992. This will now allow companies to calculate their R&D credit based on the Alternative Simplified Calculation (ASC). The ASC eliminates gross receipts from the calculation and allows companies to use the last 3 years of qualified research expenses in order to calculate the credit. Previously companies were required to use the old fixed-base percentage calculation.
Second, the bill clarifies that 26 U.S.C s.41 relating to termination shall not apply to New Jersey taxpayers. So, in the case of elimination of the Federal R&D Tax Credit program, the New Jersey R&D tax credit will remain in place. Third, the new law reasserts that the R&D tax credit is NOT refundable.
The new law now aligns New Jersey’s credit calculation with the current Federal statute. Many companies may have previously been ineligible for the New Jersey R&D tax credit because they did not exceed the base period under the regular credit calculation or were unable to document the older base period years. The changes may allow companies to now qualify for the R&D tax credit starting in 2018. Although the bill also reasserts that the credit is not refundable, the credit can still be sold under the Technology Business Tax Certificate Transfer Program.
Calculating the R&D tax credit and compiling the information required for the application for the NOL program can be arduous, and at times confusing, but extremely lucrative. If you have any questions, please feel free to reach out to the PMBA National R&D Tax Credit Practice at R&DTaxIncentives@pmba.com.