R&D in New Jersey

R&D Tax Credits

New Jersey

The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits.

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.

R&D Tax Credits in New Jersey

New Jersey’s R&D tax credit is designed to benefit businesses that are involved in research and development activities. The credit extends to several expenses that include engineer salaries and wages, material costs, and even third-party contractor fees that are incurred during R&D work. The aim is to stimulate companies to increase their spending on R&D each year. The eligible expenses that qualify for the state credit follow the federal guidelines as laid down in section 41(d) of the Internal Revenue Code. By offering this credit, the state intends to foster a culture of innovation and technological advancement among businesses in New Jersey.

What Goes into the New Jersey R&D Tax Credit as a Qualified Research Expense?

The New Jersey research and development tax credit allows for businesses to claim a percentage of their qualifying research expenses. 

In order for an expense to qualify it must meet specific research criteria:

  1. Products, services, processes, or software must be new or improved in some way 
  2. Uncertainty must be eliminated as a result of the research 
  3. The research must be technological 
  4. Research must include experimentation processes of some nature

The types of expenses that are applicable to claim under the credit include the following:

Wages paid to employees who are directly involved in the performance of research and development activities within the state of New Jersey. This includes payments made to subcontractors involved in the performance of such activities.

Take Advantage of the
R&D Tax Credit with Source Advisors

Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.