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.

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.

Total QREs
Total QREs
Year 3
Year 2
Year 1
Total $2,000,000 $211,166 $2,000,000 $100,000

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

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

Technological in Nature
Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

Permitted Purpose
Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

Eliminate Uncertainty
Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.