Posted by Jeffrey Feingold on 12.11.20
Federal and state tax credits are available to a host of industries for activities that are deemed pertinent to research and development (R&D). The permanent extension of the federal R&D tax credit program, Protecting Americans from Tax Hikes (PATH), in 2015 is a good reminder that there are also valuable state credits available to businesses for qualifying activities.
Today, over 40 states, including New Jersey, offer their own R&D tax credits with attractive features and additional advantages.
The New Jersey R&D Tax Credit
The state of New Jersey, which offers a tax incentive for R&D investment for both manufacturers and R&D companies, allows a qualified business enterprise to claim a state R&D tax credit for qualified research expenses (QREs). A tax credit for increased research activities is allowed based on qualified expenditures made in taxable years beginning on and after Jan. 1, 1994.
Which Activities Qualify?
Qualified research is limited to scientific experimentation or engineering activities designed to aid in the development of a new or improved product, process, technique, formula, invention, or computer software programs held for sale, lease, or license, or used by the taxpayer in a trade or business. Job shops, including those working with precision metal, plastic injection mold, fabrication and service for hire, are all good candidates for the tax credits. For in-house research expenses (see Section 41(b)(2) of the Internal Revenue Code), this trade or business requirement will be met if the taxpayer’s principal purpose for conducting the research is to use the results of the research in the active conduct of a future trade or business (see Section 41(b)(4) of the Internal Revenue Code).
How is the New Jersey Tax Credit Calculated?
New Jersey provides a credit of 10% of the excess QREs over a base amount plus 10% of the basic research payments. The New Jersey R&D tax credit is allowed based on qualified expenditures made in taxable years beginning after 1993. If the research credit cannot be used because of tax liability limitations, it may be carried forward for either seven or 15 years as follows:
Property and expenditures included in the calculation of the R&D tax credit are not permitted to be included in the calculation of the following tax credits:
How is this Related to the Federal Income Tax Credit?
To receive a New Jersey R&D tax credit, the corporation must be allowed a research credit for the taxable year against federal income tax for qualified research expenses under s. 41, IRC. Click here to view federal forms. The New Jersey R&D tax credit closely resembles the federal credit program; however, it specifically offers qualifying New Jersey companies many unique features for doing business in New Jersey.
Reconciling Federal and State R&D credits
When research and experimental expenditures are also used to compute a federal credit claimed pursuant to section 41 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.41, if applicable, must be added back on Schedule A of the CBT-100, CBT-100S or BFC-1 return on the line for “Other deductions and additions.” Refer to the Schedule A instructions for the appropriate return. Form 306 lists specific instructions on calculating the fixed rate percentage ratio.
How Do I Apply?
Claim the credit on the return for the taxable year you incurred the qualified expenses using New Jersey Corporate Business Tax Form 306. Tax Point Advisors can answer your questions about New Jersey tax credits. To learn more about whether your industry and company activities qualify for the R&D tax credit, request a free assessment today.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, please contact (800) 260-4138 or please leave us a message below.
