The New (and Improved!) New Jersey R&D Tax Credit
New Jersey taxpayers have gotten a long-awaited change to the New Jersey R&D tax credit – specifically an Alternative Simplified Credit method. These changes are effective for tax years beginning on or after January 1, 2018.
New Jersey has offered an R&D tax credit since 1992. The activities qualifying for the credit were based upon the federal rules under IRC Sec. 41. At that time, only the Regular Credit method was established. Therefore, many companies claiming the Alternative Simplified Credit (ASC) method for federal purposes may not have been able to claim a credit in New Jersey. Both credits are only available to corporations.
For more information on the federal R&D tax credit, click here.
The new credit method is calculated similarly to the federal ASC method where the base amount is 50% of the average of the prior three-year qualified research expense (QRE). However, there are differences:
- Where there are no QREs in the prior three tax years, taxpayers still apply the current year QREs against the credit rate of 10%. This is in contrast with the federal calculation where the credit rate drops from 14% to 6% in this scenario.
- The taxpayer must claim the same method (Regular or ASC) for New Jersey as federal.
- Interaction with the federal payroll refund:
- A taxpayer CANNOT use the QREs claimed for the federal payroll refund for the New Jersey credit.
- The rationale is that the New Jersey credit is based upon the federal corporate income tax credit. Under The Protecting Americans from Tax Hikes Act of 2015, the payroll refund offset for qualified small businesses was a separate credit under IRC Sec. 3111(f).
- Therefore it will be critical for taxpayers to use the IRS Form 6765 as a starting point on the New Jersey credit.
What this means
- Taxpayers with large revenues were likely not creditable under the previous New Jersey credit regime (Regular method). If they have QREs in New Jersey, they should perform the ASC method to see if creditable.
- If the taxpayer is claiming the federal ASC method, they need to ensure that method is used for New Jersey.
- Many taxpayers are qualified small businesses and claim the payroll offset. Those expenses are not includable in the New Jersey credit calculation.