N.J. Admin. Code § 18:7-3.23A

Current through Register Vol. 56, No. 21, November 4, 2024

Section 18:7-3.23A - New Jersey research credit for privilege periods beginning on and after January 1, 2018

(a) A taxpayer may be allowed a credit against its corporation business tax liability in an amount equal to 10 percent of the excess of the qualified research expenses for the privilege period over the base amount, and 10 percent of the basic research payments for the privilege period determined in accordance with I.R.C. § 41. All of the terms, definitions, rules, methods for calculating the credit, and restrictions are consistent with the terms, definitions, rules, methods for calculating the credit, and restrictions at I.R.C. § 41, and the applicable regulations promulgated by the U.S. Department of the Treasury, except as otherwise noted in this section. Amounts paid, incurred, or accrued by the taxpayer for energy research in New Jersey may also qualify for the New Jersey research credit if the amounts qualify for the Federal corporate income tax credit pursuant to I.R.C. § 41.

(b) Consistent treatment of expenses is required. Notwithstanding whether the period for filing a claim for credit or refund has expired for any tax year taken into account in determining the fixed-base percentage, the qualified research expenses taken into account in computing such percentage must be determined on a basis consistent with the determination of qualified research expenses for the credit year.

(c) The New Jersey research credit that is available on and after January 1, 2018, is not refundable; and no provision under the Internal Revenue Code making the Federal research and development credit refundable for any Federal tax shall apply for New Jersey corporation business tax purposes.

(d) Notwithstanding any provision in this section to the contrary, other than calculations made pursuant to (j) below, a credit may be claimed for only those research activities that are performed in New Jersey.

(e) The filing of a consolidated tax return by a controlled group of corporations is not permitted for privilege periods ending before July 31, 2019. In calculating the New Jersey research credit, a combined group filing either a mandatory or elective New Jersey combined return must use the Federal rules for calculating the credit pursuant to I.R.C. § 41(f)(1) and N.J.S.A. 54:10A-4.6.n; provided, however, the credit will be calculated based on expenditures in New Jersey by the combined group filing a New Jersey combined return.

(f) Any act of Congress terminating I.R.C. § 41 will not terminate the research credit available for New Jersey corporation business tax purposes. Thus, in the event of the repeal of I.R.C. § 41, the New Jersey research and development credit will be determined based on I.R.C. § 41 that was in effect the last day prior to the effective date of the repeal by Congress.

(g) The research credit is allowed for qualified research in New Jersey. The research expenditures must meet the qualifications of both I.R.C. §§ 41 and 174, subject to applicable restrictions in the Internal Revenue Code and the New Jersey Corporation Business Tax Act. (See I.R.C. §§ 41 and 174, and regulations promulgated thereunder for other definitions and special rules.)

(h) In calculating the New Jersey research credit, a taxpayer is bound by the method for calculating the credit that the taxpayer uses for Federal purposes as reported on their Federal return when taking the credit for Federal tax purposes, except as provided for at (f) above (detailing the effect of repeal of I.R.C. § 41 by Congress). If a taxpayer files an amended Federal return changing the method used or adjusting the amount of credit claimed for Federal purposes, the taxpayer must file an amended New Jersey corporation business tax return reflecting such change in method for calculating the credit or the adjustment for the amount of the credit claimed. If the Internal Revenue Service makes adjustments to the amount of qualifying expenses, the taxpayer must reflect these adjustments by also filing an amended New Jersey corporation business tax return. Adjustments made for qualifying expenses for the Federal credit will not increase or decrease the New Jersey credit if the expenses are not for research conducted in New Jersey. In the case of repeal by Congress, in calculating the New Jersey research and development credit, a taxpayer would use the method for calculating the credit that the taxpayer would have used for Federal purposes as would have been reported on their Federal return when taking the credit for Federal tax purposes if I.R.C. § 41 had not been repealed by Congress.

(i) Credit for increased research activities must take priority as specified at N.J.S.A. 54:10A-5.24.b. If any amount of property or expenditures is included in the calculation of the research credit, then no such amounts are allowable for the credit, as specified at N.J.S.A. 54:10A-5.24.b.

(j) If a taxpayer has research conducted both within and outside New Jersey and cannot determine the amount of New Jersey qualified research expenses for periods beginning on or after January 1, 2018, the taxpayer may calculate the amount of the New Jersey qualified research expenses to be used for the research credit by multiplying the qualified research expenditures everywhere by a three-factor fraction consisting of New Jersey property, payroll, and receipts in the numerator over property, payroll, and receipts everywhere in the denominator.

1. For a combined group filing either a mandatory or elective New Jersey combined return, where the combined group has research both within and outside New Jersey and cannot determine the amount of New Jersey qualified research expenses for the period, the taxable members of the combined group may calculate the amount of the New Jersey qualified research expenses to be used for the research credit by multiplying the qualified research expenditures everywhere by a three-factor fraction consisting of New Jersey property, payroll, and receipts in the numerator over property, payroll, and receipts everywhere in the denominator.

(k) Any Federal deduction pursuant to I.R.C. § 174 is the same for New Jersey purposes since there is no New Jersey provision for a separate modified State tax credit amount under such circumstances.

(l) The credit allowable in any given privilege period cannot reduce the tax liability to any amount less than the statutory minimum provided at N.J.S.A. 54:10A-5(e). In the case of a New Jersey combined group, the credit that was shared and used by a member shall be subject to the same limitation.

(m) The amount of the tax year credit allowable that cannot be applied for the tax year due to certain limitations may be carried over, to the seven consecutive privilege periods following a credit's tax year, except as provided at N.J.S.A. 54:10A-5.24.b and 54:10A-5.24b (which allows the carryover to be 15 privilege periods for businesses performing qualifying research in certain fields (advanced computing, advanced materials, biotechnology, electronic device technology, environmental technology, and medical device technology) as defined at N.J.S.A. 54:10A-5.24b.b).

(n) Research credits allowable must be applied in the order of the tax years in which the credits were earned.

(o) The provisions at I.R.C. §§ 41(f)(2) and 41(g), and applicable Federal regulations allowing for the flow-through of a credit from a pass-through entity also apply to the New Jersey research credit to the extent that such regulations are consistent with the New Jersey Corporation Business Tax Act.

(p) The Director of the Division of Taxation reserves the right to make adjustments to the New Jersey credit pursuant to N.J.S.A. 54:10A-4(k)(3) and 54:10A-10.

(q) For purposes of the New Jersey research credit, gross receipts for any tax year must be reduced by returns and allowances made during the tax year to the extent such returns and allowances would reduce the gross receipts for the purposes of the Federal credit. In the case of a foreign corporation, only gross receipts that are effectively connected with the conduct of a trade or business within the United States are taken into account.

(r) For privilege periods beginning on and after January 1, 2020, the portion of qualified research expenses and qualified payments of a taxpayer that is a qualified small business within the meaning of I.R.C. § 41(h)(3) that was disallowed for the I.R.C. § 41 corporate income tax credit because the taxpayer made an election pursuant to I.R.C. §§ 41(h) and 3111(f) to take the I.R.C. § 3111(f) payroll credit in lieu of the I.R.C. § 41 corporate income tax credit, shall be allowed for the purposes of calculating the New Jersey research credit provided for pursuant to this section.

(s) Examples:

Example 1: A taxpayer performs 50 percent of their research in New Jersey and 50 percent in Pennsylvania. Of the expenses that qualify for Federal purposes, only 50 percent are attributable to research performed in New Jersey and may be used for the purposes of the New Jersey research credit.

Example 2: Companies A, B, C, D, E, and F are members of a combined group. Company A performs research in New Jersey and receives payments from the other combined group members for qualified research expenses within the meaning of I.R.C. § 41(b) for research conducted on their behalf. Company E is located in Maine and also receives payments from the other combined group members for qualified research expenses within the meaning of I.R.C. § 41(b) for research conducted on their behalf. Although the research payments made to both Company A and E qualify for a Federal research credit, only the research payments to Company A qualify for the New Jersey research credit. The members of the combined group will be able to share their New Jersey research credit pursuant to N.J.S.A. 54:10A-4.6.i.

Example 3: Company T is a qualified small business and a start-up company that performs research in New Jersey. For Federal purposes, Company T made an election pursuant to I.R.C. § 41(h) for the Federal payroll tax credit at I.R.C. § 3111(f) to use 25 percent of its qualified research expenditures for the Federal payroll credit instead of the Federal corporate income tax research credit. Only 75 percent of the qualified research expenditures may be used for calculating the New Jersey research credit. The other 25 percent of the qualified research expenditures may be used by Company T for other New Jersey credits (such as the Manufacturing Equipment and Investment Tax Credit, the Angel Investor Credit, the New Jobs Investment Credit, etc.), if applicable, and if Company T otherwise qualifies for the other New Jersey credits.

N.J. Admin. Code § 18:7-3.23A

Adopted by 54 N.J.R. 1819(a), effective 9/19/2022