This month we are continuing our “What’s Happening in Your State?” series, where we provide information about the R&D credit in a different state each month. This month, we are focusing on New Jersey!
1. Qualified research expenses in New Jersey are capturable
First, qualified research expenses occurring in New Jersey for qualified activities are capturable. The qualification requirements closely follow the federal definitions contained within Section 41 of the Internal Revenue Code. The credit is equal to 10% of the excess of qualified research expenditures over the base amount, plus 10% of basic research payments. The base amount must follow the same method used for the federal calculation (Regular Credit Method or Alternative Simplified Credit Method). The statute of limitations to claim the R&D credit is typically 3 years from the date the original return was filed or two years after tax is paid, whichever is later.
2. New Jersey R&D Credit is only used to offset net income component of the corporation business tax
One very important distinction from the federal credit is that the New Jersey R&D credit can only be used to offset the net income component of the corporation business tax. This means that only C corporations and S corporations are eligible; the credit cannot be passed through to individual shareholders and it is not available to partnerships and other pass-through entities. The credit can be carried forward for 7 years in most instances, or for 15 years if qualified research expenses have been incurred and basic research payments have been made for research conducted in New Jersey in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, environmental technology, and medical device technology.
3. How can EPSA USA help you claim the New Jersey R&D Credit ?
While our clients are usually disappointed to learn that the credit cannot be passed through to the individual shareholders, they are usually happy to discover that the credit can bring the company’s net income component of the corporation business tax to $0. We work with our clients and CPA partners to evaluate the tax paying position of the company and determine an appropriate strategy for calculating the New Jersey R&D credit based on the amount of credits a taxpayer can use. We do not want to calculate a credit for a client they cannot use!
The New Jersey R&D credit can be beneficial, especially for corporations, but the differences between the Federal and New Jersey credit are significant, and it is very imperative that you work with a provider who is familiar with the nuances of the New Jersey credit calculation.
Interested in learning more about how your company may be able to take advantage of the New Jersey R&D credit? Submit your information here!