In July 2018, the state enacted Assembly Bill 4202 which amended the R&D tax credit to allow using a new calculation method. For tax years beginning in 2018, New Jersey corporations now have the option of using the alternative simplified credit (ASC) method, conforming to the federal credit detailed in Internal Revenue Code Section 41.
Previously, the only option available to New Jersey corporations was the traditional credit method, which relies on gross receipts and a fixed based percentage to determine the credit. The traditional method has long prevented companies that have relatively high gross receipts, compared to their qualified expenses, from realizing a New Jersey tax benefit. Additionally, corporations that did not have a reasonable methodology for accurately calculating a fixed base percentage were left without a means to benefit from the program.
The New Jersey R&D credit is only available to C corporations and S corporations. The credit is reported on Form 306, Research and Development Tax Credit under the traditional calculation method, the credit is equal to 10 percent of the smaller of the current-year qualified research expenses in excess of a base amount or 50 percent of the current-year qualified research expenses, plus 10 percent of basic research payments for the tax period, as determined under IRC Section 41. The factors used in the calculation of the base amount are historical qualified research expenses and gross receipts. Qualified expenses refers to expenses derived from qualified activities performed within the state.
The ASC credit is 10 percent of the current-year qualified research expenses in excess of 50 percent of the average qualified research expenses for the three tax years preceding the tax year for which the credit is being determined. The ASC method tends to be a less burdensome calculation for taxpayers since it only requires examination of expenses in the credit year and for the prior three years.
The credit is nonrefundable – unused R&D credits can be carried forward for a period of seven years.
However, corporations performing research in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, environmental technology, and medical device technology, are allowed to carry forward the tax credit for up to 15 years.
Selling New Jersey R&D credits
The New Jersey Technology Business Tax Certificate Transfer Program allows qualified, unprofitable New Jersey based technology and biotechnology companies to sell their net operating losses (NOLs) and unused R&D tax credits to unrelated profitable corporations. The New Jersey Economic Development Authority determines taxpayer eligibility for this program.
Among other requirements, eligible corporations must have their headquarters or base operations located within the state and must have fewer than 225 full time employees in the U.S., including employees of affiliates, parents and subsidiaries.
The application fee for the program costs $2,500; applications are due by June 30. The maximum annual award allotment for the program is $60 million, $10 million of which is set aside for research within three designated innovation zones. Corporations should be aware that there are recapture provisions for taxpayers that fail to maintain their headquarters or base of operations in the state for a period of five years from the sale.
This program is a great revenue-raising vehicle for taxpayers that traditionally spend years of resources on research before having a viable product or solution ready for commercial sale.
In addition to implementing the ASC method, the new bill makes it clear that despite being coupled to the Federal credit under IRC Section 41, any subsequent changes by Congress to terminate or make the federal credit refundable would not have any impact on the New Jersey credit.
The new rules also provide that corporations claiming the New Jersey credit must utilize the same calculation methodology for state purposes that was used to calculate the federal credit under IRC Section 41. Therefore, corporations using the traditional method for federal purposes must continue to utilize the traditional method to claim the state credit.
Yair Holtzman is a tax partner and R&D tax credits and incentives practice leader at Anchin, Block & Anchin LLP. Sharlene Sylvia-Casimir is a senior manager in Anchin’s R&D tax credits & incentives practice.