Beginning with the 2018 tax years, the New Jersey Research and Development tax credit (R&D Credit) will better conform to the federal R&D Credit. Enacted as a supporting bill to the fiscal year 2019 budget bill, Assembly Bill 4202 amends the state R&D Credit to incorporate the current version of the Internal Revenue Code (IRC). This amendment allows taxpayers to calculate their R&D credit using the Alternative Simplified Calculation (ASC), which was previously unavailable in calculating the state credit.
The New Jersey R&D Credit enables corporate entities to reduce their corporation business tax by 10 percent of their qualified research expense incurred in New Jersey. New Jersey incorporates the federal definition of qualified research expense which incorporates both in-house and contract research expenses. Unused credits may be carried forward seven years. For partnerships, which are unitary with a corporation, the amount of the total credit permitted to the corporation after flow through is capped at 50 percent. For partnerships not unitary with a corporation, the credit will flow through to the corporate partners and may only be used to offset 50 percent of the incremental tax attributable to the partnership’s income contribution to the corporation.
Assembly Bill 4202 modifies the statute governing the state R&D Credit, removing a long-established reference to the IRC as it stood in 1992. As a result, companies will now be eligible to calculate the R&D Credit using the ASC election provided by IRC Section 41(c)(5) and are no longer required to use the old fixed-base percentage calculation to determine the state credit amount. The ASC relies on the taxpayer’s recent qualified research expenses and eliminates gross receipts from the calculation. Using the ASC, taxpayers may receive a benefit so long as the credit year’s qualified research spending exceeds 50 percent of the prior three-year average spending.
Taxpayers should re-evaluate their research and development expenditures and credit calculations if they were previously unable to claim the R&D Credit because (a) they were unable to exceed the base period under the regular credit calculation methodology of the federal R&D Credit, or (b) were unable to properly document the base period. Beginning in 2018, those taxpayers may be able to claim the credit using the ASC election in New Jersey.