Update effective June 30, 2020: New Jersey extended the application deadline for the Technology Business Tax Certificate Transfer Program from June 30, 2020 to Sept. 30, 2020. This brings the program into alignment with New Jersey’s previously extended corporate income tax filing date as well as provides qualifying life sciences and technology company’s additional time to claim this valuable cash benefit. In addition, companies that filed under the original June 30, 2020 deadline have until the extended due date of Sept. 30, 2020, to provide any supplemental information or documentation.
The New Jersey Technology Business Tax Certificate Transfer Program is opening applications earlier than usual this year to help provide much needed cash to companies during the COVID-19 pandemic. Applications for the 2020 year will open the week of May 1, 2020 and close Sept. 30, 2020. This program enables approved New Jersey-based technology and biotechnology companies meeting the eligibility criteria to sell their unused state net operating losses (NOL) and state research and development (R&D) tax credits to unrelated New Jersey corporate taxpayers. This provides cash flow by allowing unprofitable New Jersey corporations to currently monetize their unused NOLs and R&D credits.
The state requires NOLs and R&D credits to be transferred at a discount, which cannot be less than 80% of the tax benefit value. In order to be eligible for this program, companies must meet the following criteria:
- Be a technology or biotechnology company whose primary business involves the provision of a scientific process, product or service
- Have fewer than 225 employees (including parent company and all subsidiaries). Utilization of a Professional Employment Organization will not necessarily preclude eligibility
- Own, have filed for, or have a license to use protected, proprietary intellectual property, which is defined as a patent or registered copyright
- Has not had positive net operating income on either of its last two full-year GAAP income statements (as compiled, reviewed, or audited by an independent CPA firm), nor has a parent company or is a member of a consolidated group of affiliates (for federal income tax purposes) with positive net operating income
- Have at least:
- One full-time employee working in New Jersey if incorporated or formed less than three years
- Five full-time employees in New Jersey if incorporated or formed more than three but less than five years.
- Ten full-time employees in New Jersey if incorporated or formed more than five years ago
- Healthcare coverage must be available and offered to all full-time New Jersey employees
Eligible applicants must timely file their corporate business tax return with all attachments and schedules with the New Jersey Division of Taxation. On April 14, 2020, New Jersey enacted legislation that extends the state’s income and corporate tax filing deadline for the 2019 tax year to July 15, 2020. If applications are not submitted before the June 30, 2020 deadline, the company will not be able to claim the benefit for 2019 but may still be permitted to sell any accumulated NOLs and R&D credits, up to the $15M lifetime maximum benefit, in future fiscal years.
Each fiscal year the state allots for a total of $60M for approved companies, and each company is limited to a maximum lifetime tax benefit of $15M. In 2018, 49 companies were approved to share the full allotment of $60M. Once approved, a business must maintain a headquarters or base of operation in New Jersey during the five years following the receipt of assistance under this program. In addition, funds issued under this program must be used for expenses incurred in connection with the operation of an emerging technology or biotechnology company in New Jersey. These costs include, but are not limited to, the expenses of fixed assets, such as the construction, acquisition and development of real estate, materials, start-up, tenant fit-out, research and development, working capital, and any other expenses determined by the authority to be necessary. If the business leaves the state or does not appropriately use the funds, the company will be required to remit all or part of the funds received.
This program provides an excellent source of non-dilutive, cash funding that can be reinvested back into the company to support research, product development, and staff augmentation. Companies grappling with liquidity issues related to COVID-19 should seek relief under this program to generate funds for working capital and other uses. It is likely that there will be a surge in applications this year as companies seek economic relief from the coronavirus impact, and the program has a cap of $60M in benefits for each fiscal year. Recent years have seen the funding fully exhausted by applications, so it is important that companies apply as soon as possible. On average, approved companies can expect to receive funding within six to eight months after the June 30 application deadline. The provisions and requirements under this program are complex, and corporate taxpayers should consult their tax advisors to assess their eligibility.
Businesses in every industry should consider State tax planning in response to economic distress. For more information on the coronavirus, please see RSM’s Coronavirus Resource Center which includes related and frequently updated developments.