Are R&D Tax Credits Available in New Jersey?

Yes. The state of New Jersey provides the Research and Development (R&D) Tax Credit which leverages the federal section 41 rules regarding the calculation and qualification of qualified research activities with some modifications:

  • An R&D Tax Credit against the entire net income component of the corporation business tax is allowed for qualifying research activities performed in New Jersey.
  • The New Jersey R&D tax credit is equal to 10% of the excess of the qualified research expenses for the tax period over the base amount, plus 10% of basic research payments for the tax period, as determined under IRC Sec. 41.
  • The R&D Tax Credit is only available to corporations (both C and S corporations). 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 is not permitted.
  • Credit is not available to partnerships and other pass-thru entities.
  • The credit is allowed based on qualified expenditures made in taxable years beginning after 1993.
  • Any unused R&D Tax Credits can be carried forward for 7 years.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

New Jersey R&D Tax Credit Case Study

A New Jersey engineering firm with fewer than 30 employees had never claimed the R&D Tax Credit before. This project involved a multi-year study.

The Company qualified for federal R&D Tax Credits of $211,166 and an additional credit of $100,000 in NJ state R&D Tax Credit.

FEDERAL
NEW JERSEY
Year
Total QREs
Credit
Total QREs
Credit
Year 3
$950,000
$101,500
$950,000
$47,500
Year 2
600,000
61,833
600,000
30,000
Year 1
450,000
47,833
450,000
22,500
Total $2,000,000 $211,166 $2,000,000 $100,000

You can read more about this New Jersey tax credit case study here.