How to Claim the New Jersey R&D Tax Credit

The New Jersey Research and Development (R&D) Tax Credit is a financial incentive that directly reduces a company’s tax liability. It rewards investment in activities within the state that lead to new or improved products and processes. This credit is available to businesses that engage in specific types of technological research and development.

Determining Business Eligibility

To qualify for the New Jersey R&D Tax Credit, a business must have a presence, or nexus, within the state and be subject to either the Corporation Business Tax (CBT) or the Gross Income Tax. The credit is available to C-Corporations and, in some instances, S-Corporations. For S-Corporations, the credit can only be used to offset their own New Jersey corporate tax liability and cannot be passed through to individual shareholders.

A primary requirement is that the qualified research activities must physically take place within New Jersey. Expenses incurred for research conducted outside of the state are not eligible for this credit. The credit is intended for companies actively contributing to the state’s innovation ecosystem.

Identifying Qualified Research Expenses

The foundation of the R&D tax credit is identifying Qualified Research Expenses (QREs), which New Jersey law aligns with the federal definition. For an activity to be qualified research, it must satisfy a four-part test. The activity must have a permitted purpose to create a new or improved business component in function, performance, or quality. It must also be technological in nature, relying on principles of the physical or biological sciences, engineering, or computer science.

The research must also seek to eliminate uncertainty concerning the capability or method for developing or improving the product or process. Finally, the activity must involve a process of experimentation, which includes evaluating one or more alternatives to achieve a result, such as through modeling or simulation.

Once an activity meets the four-part test, associated costs can be classified as QREs, which fall into two categories: in-house and contract research expenses. In-house expenses include wages paid to employees for performing or supporting qualified research. This also covers the cost of supplies used in the research process, but excludes land or depreciable property.

Contract research expenses are payments made to a third party for conducting qualified research on the company’s behalf. For these costs to qualify, the business must retain substantial rights to the research results and bear the financial risk of the project. Generally, 65% of payments made to a third-party contractor can be included as a QRE.

Calculating the Credit Amount

New Jersey provides two methods for calculating the R&D tax credit: the Regular Credit Calculation and the Alternative Simplified Credit (ASC). The Regular Credit is 10% of the excess of the current year’s New Jersey QREs over a base amount, plus 10% of basic research payments made to qualified institutions.

The “base amount” is calculated by multiplying the company’s “fixed-base percentage” by its average annual gross receipts from the four preceding tax years. The fixed-base percentage is the ratio of the company’s total QREs to its total gross receipts for a specific historical period, such as the 1984-1988 period.

Alternatively, businesses can use the ASC method. The ASC is calculated as a percentage of the current year’s QREs that exceed 50% of the average QREs for the three preceding tax years. This method is advantageous for companies without consistent R&D spending or the historical data required for the regular method.

Required Information and Form Completion

To claim the credit, a business must complete New Jersey Form 306, “Research and Development Credit.” The form requires the total New Jersey QREs for the current tax year, broken down by wages, supplies, and contract research. If using the Regular Credit Calculation, the company must also provide its gross receipts for the prior four years.

A copy of the corresponding federal Form 6765, “Credit for Increasing Research Activities,” must be attached to the New Jersey return. On Form 306, the taxpayer must indicate which calculation method—Regular or ASC—is being used to determine the final credit amount.

Claiming and Utilizing the Credit

Form 306 must be submitted with the company’s annual New Jersey tax return, such as the Corporation Business Tax return (CBT-100). The calculated credit is then used to offset the company’s tax liability for that year.

If the calculated credit exceeds the company’s tax liability, the unused portion is not lost. New Jersey allows any unused R&D tax credit to be carried forward for up to seven years. For businesses in high-tech fields like biotechnology, advanced materials, and medical device technology, this carryforward period is extended to 15 years.

Certain technology and biotechnology companies have another option for their unused credits. Through the Technology Business Tax Certificate Transfer Program, eligible businesses can sell their unused R&D tax credits to other profitable New Jersey corporations. This allows companies with limited or no tax liability to receive an immediate cash benefit.