New Jersey-based corporations involved in research activities have the opportunity to receive a tax credit against their corporation business tax for eligible expenses. The calculation of the credit involves computing 10% of the surplus of qualified research expenses above a base amount, in addition to 10% of basic research payments. This initiative serves as a financial incentive for corporations to invest in research and innovation, which can ultimately benefit the state’s economy. The credit serves to stimulate technological progress and support the growth of businesses in New Jersey.

The Federal Research & Development (R&D) Tax Credit and the New Jersey State R&D Tax Credit differ in terms of the level and nature of benefits that they offer to businesses. The federal R&D tax credit, instituted in 1981, provides a credit of up to 13% of eligible spending for novel and refined products and processes that fulfil specific criteria. Conversely, the New Jersey state credit offers a refund of 10% of excess qualified research expenses over a base amount, along with 10% of basic research payments. Also, The eligibility for the R&D Tax Credit is limited to corporations, including both C and S corporations. However, if a corporation is structured as an S corporation in New Jersey, its credits are restricted to its tax liability for the New Jersey corporation, and it’s not allowed to pass the credit through to individual shareholders.

Moreover, there exists a disparity between the types of expenses that qualify for each credit. Eligible costs for the federal credit comprise employee wages, supply costs, testing expenses, contract research expenditures, and costs associated with patent development. Conversely, the New Jersey state credit defines eligible expenses in accordance with the same federal standards as those articulated in section 41(d) of the Internal Revenue Code, and typically includes engineer wages, supply and material costs, scrap consumed during R&D work, and third-party contractor fees incurred for research.

Overall, the federal R&D tax credit is a more generous benefit, providing a greater percentage credit for a wider range of expenses. Nonetheless, the New Jersey state credit still offers significant benefits for businesses conducting R&D within the state.

New Jersey offers a tax credit for research and development expenses exclusively to C and S corporations. For S corporations, the credit is capped at their New Jersey corporation tax liability, and it cannot be passed through to individual shareholders. It’s important to note that partnerships and other pass-through entities are not eligible for New Jersey R&D Tax Credit.

To claim this tax credit in New Jersey, taxpayers must complete Form 306 for taxable periods that starts on or after January 1, 2013. This R&D Tax Credit can be sold through the NJ Tax Certificate Transfer Program, offering flexibility for those who may not be able to use it themselves. Additionally, any credits that are not utilized can be carried forward for a maximum of seven years, providing taxpayers with additional opportunities to utilise the credit in the future.