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.
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FEDERAL
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NEW JERSEY
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|||||
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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.