Current through Register Vol. 56, No. 18, September 16, 2024
(a) For
privilege periods beginning before January 1, 2018, 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 fiscal or calendar
accounting year over the base amount, and 10 percent of the basic research payments
determined in accordance with I.R.C. § 41 in effect on June 30, 1992, provided
that I.R.C. § 41(h), relating to termination of the availability of the credit
in 1995, does not apply.
(b) For
purposes of this section, the term "qualified research expenses" means the sum of
the following amounts which are paid or incurred by the taxpayer during the taxable
year in carrying on any trade or business of the taxpayer:
1. In-house research expenses; and
2. Contract research expenses.
(c) In general, the term "in-house
research expenses" means:
1. Any wages paid or
incurred to an employee for qualified services performed by such employee;
2. Any amount paid or incurred for supplies used
in the conduct of qualified research; and
3. Under Federal regulations prescribed, any
amount paid or incurred to another person for the right to use computers in the
conduct of qualified research.
i. Paragraph (c)3
above shall not apply to any amount to the extent that the taxpayer (or any person
with whom the taxpayer must aggregate expenditures under I.R.C. § 41(f)(1))
receives or accrues any amount from any other person for the right to use
substantially identical personal property.
(d) "Qualified services" means services consisting
of engaging in qualified research, or engaging in the direct supervision or direct
support of research activities which constitute qualified research. If substantially
all of the services performed by an individual for the taxpayer during the taxable
year consists of engaging in qualified research, or engaging in the direct
supervision or direct support of research activities which constitute qualified
research, the term "qualified services" means all of the services performed by such
individual for the taxpayer during the taxable year.
(e) The term "supplies" means any tangible
property other than:
1. Land or improvements to
land; and
2. Property of a character
subject to allowance for depreciation.
(f) The term "wages" means:
1. In general, the term "wages" has the meaning
given such term by I.R.C. § 3401(a).
2. For self-employed individuals and
owner-employees, in the case of an employee (within the meaning of I.R.C. §
401(c)(1)), the term "wages" includes the earned income (as defined in I.R.C. §
401(c)(2)) of such employee.
3.
Exclusion for wages to which targeted jobs credit applies, the term "wages" shall
not include any amount taken into account in determining the targeted jobs credit
under I.R.C. § 51(a).
(g) In general, the term "contract research
expenses" means 65 percent of any amount paid or incurred by the taxpayer to any
person (other than an employee of the taxpayer) for qualified research.
1. If any contract research expenses paid or
incurred during any taxable year are attributable to qualified research to be
conducted after the close of such taxable year, such amount shall be treated as paid
or incurred during the period during which the qualified research is
conducted.
(h) Trade or
business requirement may be disregarded for in-house research expenses of certain
start-up ventures. In the case of in-house research expenses, a taxpayer shall be
treated as meeting the trade or business requirement of (b) above if, at the time
such in-house research expenses are paid or incurred, the principal purpose of the
taxpayer in making such expenditures is to use the results of the research in the
active conduct of a future trade or business:
1.
Of the taxpayer; or
2. Of one or more
other persons who with the taxpayer are treated as a single taxpayer under I.R.C.
§ 41(f)(1).
(i) Base
amount requirements are as follows:
1. In general,
the term "base amount" means the product of:
i.
The fixed-base percentage; and
ii. The
average annual gross receipts of the taxpayer for the four taxable years preceding
the taxable year for which the credit is being determined (hereinafter referred to
as the "credit year").
2. In
no event shall the base amount be less than 50 percent of the qualified research
expenses for the credit year.
3.
Fixed-base percentage requirements are as follows:
i. Except as otherwise provided in this paragraph,
the fixed-base percentage is the percentage which the aggregate qualified research
expenses of the taxpayer for taxable years beginning after December 31, 1983, and
before January 1, 1989, is of the aggregate gross receipts of the taxpayer for such
taxable years.
ii. Start-up companies
shall comply with the following:
(1) For taxpayers
to which this subparagraph applies, the fixed-base percentage shall be determined
under this subparagraph if there are fewer than three taxable years beginning after
December 31, 1983, and before January 1, 1989, in which the taxpayer had both gross
receipts and qualified research expenses.
(2) In a case to which this subparagraph applies,
the fixed-base percentage is:
(A) Three percent
for each of the taxpayer's first five taxable years beginning after December 31,
1993, for which the taxpayer has qualified research expenses;
(B) In the case of the taxpayer's sixth such
taxable year, one-sixth of the percentage which the aggregate qualified research
expenses of the taxpayer for the fourth and fifth such taxable years is of the
aggregate gross receipts of the taxpayer for such years;
(C) In the case of the taxpayer's seventh such
taxable year, one-third of the percentage which the aggregate qualified research
expenses of the taxpayer for the fifth and sixth such taxable years is of the
aggregate gross receipts of the taxpayer for such years;
(D) In the case of the taxpayer's eighth such
taxable year, one-half of the percentage which the aggregate qualified research
expenses of the taxpayer for the fifth, sixth, and seventh such taxable years is of
the aggregate gross receipts of the taxpayer for such years;
(E) In the case of the taxpayer's ninth such
taxable year, two-thirds of the percentage which the aggregate qualified research
expenses of the taxpayer for the fifth, sixth, seventh, and eighth such taxable
years is of the aggregate gross receipts of the taxpayer for such years;
(F) In the case of the taxpayer's tenth such
taxable year, five-sixths of the percentage which the aggregate qualified research
expenses of the taxpayer for the fifth, sixth, seventh, eighth, and ninth such
taxable years is of the aggregate gross receipts of the taxpayer for such years;
and
(G) For taxable years thereafter,
the percentage which the aggregate qualified research expenses for any five taxable
years selected by the taxpayer from among the fifth through the tenth such taxable
years is of the aggregate gross receipts of the taxpayer for such selected
years.
(3) The Director may
in future prescribe rules providing that de minimis amounts of gross receipts and
qualified research expenses shall be disregarded under (i)3ii(1) and (2)
above.
iii. In no event shall
the fixed-base percentage exceed 16 percent.
iv. The percentages determined under (i)3i above
shall be rounded to the nearest <1>/[100]th of one percent.
4. Consistent treatment of expenses is
required. Notwithstanding whether the period for filing a claim for credit or refund
has expired for any taxable year taken into account in determining the fixed-base
percentage, the qualified research expenses taken into account in computing such
percentage shall be determined on a basis consistent with the determination of
qualified research expenses for the credit year.
5. For purposes of this subsection, gross receipts
for any taxable year shall be reduced by returns and allowances made during the
taxable year. In the case of a foreign corporation, there shall be taken into
account only gross receipts which are effectively connected with the conduct of a
trade of business within the United States.
(j) Qualified research, for purposes of this
subsection, is defined as follows:
1. The term
"qualified research" means research:
i. With
respect to which expenditures may be treated as expenses under I.R.C. §
174;
ii. Which is undertaken for the
purpose of discovering information
(1) Which is
technological in nature; and
(2) The
application of which is intended to be useful in the development of a new or
improved business component of the taxpayer;
iii. Substantially all of the activities of which
constitute elements of a process of experimentation for a purpose described in (j)3
below; and
iv. Does not include any
activity described in (j)4 below.
2. For purposes of this subsection, the following
tests shall be applied separately to each business component:
i. In general, (j)1 above shall be applied
separately with respect to each business component of the taxpayer.
ii. The term "business component" means any
product, process, computer software, technique, formula, or invention which is to
be:
(1) Held for sale, lease, or license;
or
(2) Used by the taxpayer in a trade
or business of the taxpayer.
iii. Any plant process, machinery, or technique
for commercial production of a business component shall be treated as a separate
business component (and not as part of the business component being
produced).
3. For purposes of
(j)1iii above, the following are purposes for which research may qualify for credit:
i. In general, research shall be treated as
conducted for a purpose described in this paragraph if it relates to:
(1) A new or improved function;
(2) Performance; or
(3) Reliability or quality.
ii. Research shall, in no event, be treated as
conducted for a purpose described in this paragraph if such research relates to
style, taste, cosmetic, or seasonal design factors.
4. The term "qualified research" shall not
include, nor shall credit be allowed for, any of the following:
i. Research after commercial production, that is,
any research conducted after the beginning of commercial production of the business
component;
ii. Adaptation of existing
business components, that is, any research related to the adaptation of an existing
business component to a particular customer's requirement or need;
iii. Duplication of an existing business
component, that is, any research related to the reproduction of an existing business
component (in whole or in part) from a physical examination of the business
component itself or from plans, blueprints, detailed specifications, or publicly
available information with respect to such business component;
iv. Surveys, studies, or similar activities as
follows:
(1) Efficiency survey(s);
(2) Activity relating to management function or
technique;
(3) Market research, testing,
or development (including advertising or promotions);
(4) Routine data collection; or
(5) Routing or ordinary testing or inspection for
quality control;
v. Any
research with respect to computer software which is developed by (or for the benefit
of) the taxpayer primarily for internal use by the taxpayer, other than for use in:
(1) An activity which constitutes qualified
research (determined with regard to this subparagraph); or
(2) A production process with respect to which the
requirements of (j)1 above are met;
vi. Foreign research, that is, any research
conducted outside the United States;
vii. Any research in the social sciences, arts, or
humanities; or
viii. Funded research,
that is, any research to the extent funded by any grant, contract, or otherwise by
another person (or governmental entity).
(k) Credit allowable with respect to certain
payments to qualified organizations for basic research shall be as follows:
1. In general, in the case of any taxpayer who
makes basic research payments for any taxable year;
i. The amount of basic research payments taken
into account under (k)2 below shall be equal to the excess of such basic research
payments, over the qualified organization base period amount.
ii. That portion of such basic research payments
which does not exceed the qualified organization base period amount shall be treated
as contract research expenses for purposes of this paragraph.
2. Basic research payments shall be defined, for
purposes of this subsection, as follows:
i. In
general, the term "basic research payment" means, with respect to any taxable year,
any amount paid in cash during such taxable year by a corporation to any qualified
organization for basic research but only if:
(1)
Such payment is pursuant to a written agreement between such corporation and such
qualified organization; and
(2) Such
basic research is to be performed by such qualified organization.
ii. In the case of a qualified
organization described in (k)6iii or iv below (k)2i(2) above shall not
apply.
3. For purposes of
this subsection, the term "qualified organization base period amount" means any
amount equal to the sum of the minimum basic research amount, plus the
maintenance-of-effort amount.
4.
Concerning the minimum basic research amount, for purposes of this subsection:
i. In general, the term "minimum basic research
amount" means an amount equal to the greater of:
(1) One percent of the average of the sum of
amounts paid or incurred during the base period for:
(A) Any in-house research expenses; and
(B) Any contract research expenses; or
(2) The amounts treated as contract
research expenses during the base period by reason of this subsection (as in effect
during the base period).
ii.
Except in the case of a taxpayer which was in existence during the taxable year
(other than a short taxable year) in the base period, the minimum basic research
amount for any base period shall not be less than 50 percent of the basic research
payments for the taxable year for which a determination is being made under this
subsection.
5. Concerning the
maintenance of effort amount, for purposes of this subsection:
i. In general, the term "maintenance-of-effort"
amount means, with respect to any taxable year, an amount equal to the excess (if
any) of an amount equal to: the average of the nondesignated university
contributions paid by the taxpayer during the base period, multiplied by the
cost-of-living adjustment for the calendar year in which such taxable year begins,
over the amount of nondesignated university contributions paid by the taxpayer
during such taxable year.
ii.
Nondesignated university contributions, for purposes of this paragraph, means any
amount paid by a taxpayer to any qualified organization described in (k)6i below:
(1) For which a deduction was allowable under
I.R.C. § 170; and
(2) In which was
not taken into account:
(A) In computing the
amount of the credit under this provision (as in effect during the base period)
during any taxable year in the base period; or
(B) As a basic research payment for purposes of
this section.
iii.
Cost-of-living adjustment shall be defined as follows:
(1) In general, the cost-of-living adjustment for
any calendar year is the cost-of-living adjustment for such calendar year determined
under I.R.C. § 1(f)(3), by substituting "calendar year 1987" for "calendar year
1989" in subparagraph (B) of I.R.C. § 1(f)(3).
(2) If the base period of any taxpayer does not
end in 1983 or 1984, I.R.C. § 1(f)(3)(B) shall, for purposes of this paragraph,
be applied by substituting the calendar year in which the base period ends for 1989.
Such substitution shall be in lieu of the substitution under (k)5iii(1)
above.
6. For
purposes of this subsection, the term "qualified organization" means any of the
following organizations:
i. Educational
institutions, that is, any educational organization which:
(1) Is an institution of higher education (within
the meaning of I.R.C. § 3304(f)), and
(2) Is described in I.R.C. §
170(b)(1)(A)(ii).
ii. Certain
scientific research organizations, that is, any organization not described in (k)6i
above which:
(1) Is described in I.R.C. §
501(c)(3) and is exempt from tax under I.R.C. § 501(a);
(2) Is organized and operated primarily to conduct
scientific research; and
(3) Is not a
private foundation.
iii.
Scientific tax-exempt organizations, that is, any organization which:
(1) Is described in:
(A) I.R.C. § 501(c)(3) (other than a private
foundation); or
(B) I.R.C. §
501(c)(6);
(2) Is exempt from
tax under I.R.C. § 501(a); (3)-(4) (No change.)
iv. Certain grant organizations, that is, any
organization not described in (k)6ii or iii above which:
(1) Is described in I.R.C. § 501(c)(3) and is
exempt from tax under I.R.C. § 501(a) (other than a private
foundation);
(2) Is established and
maintained by an organization established before July 10, 1981, which meets the
requirements of (k)6iv(1) above;
(3) Is
organized and operated exclusively for the purpose of making grants to organizations
described in (k)6i above pursuant to written research agreements for purposes of
basic research; and
(4) Makes an
election, revocable only with the consent of the United States Secretary of the
Treasury, to be treated as a private foundation for purposes of United States Code
Title 26 (other than I.R.C. § 4940, relating to excise tax based on investment
income).
(l) Definitions and special rules shall be as
follows:
1. The term "basic research" means any
original investigation for the advancement of scientific knowledge not having a
specific commercial objective, except that such term shall not include:
i. Basic research conducted outside of the United
States; or
ii. Basic research in the
social sciences, arts, or humanities.
2. The term "base period" means the
three-taxable-year period ending with the taxable year immediately preceding the
first taxable year of the taxpayer beginning after December 31, 1983.
3. For purposes of determining the amount of
credit allowable under subsection (k)1 above, for any taxable year, the amount of
the basic research payments taken into account under (k)2 above:
i. Shall not be treated as qualified research
expenses under (k)1i above; and
ii.
Shall not be included in the computation of base amount under (k)1ii
above.
4. For purposes of
applying (b) above to this subsection, any basic research payments shall be treated
as an amount paid in carrying on a trade or business of the taxpayer in the taxable
year in which it is paid (without regard to the provisions of (g)1 above).
5. The term "corporation" shall not include:
i. An S corporation;
ii. A personal holding company (as defined in
I.R.C. § 542); or
iii. A service
organization (as defined in I.R.C. § 414(m)(3)).
(m) For Special Rules, see I.R.C.
§ 41(f).
(n) Notwithstanding any
provision in this section to the contrary, other than calculations made pursuant to
(u) below, a credit can be claimed for only those research activities that are
performed in New Jersey.
(o)
Notwithstanding any provision in this section to the contrary, a credit for
increased research activities is allowed based on qualified expenditures made in
taxable years beginning on and after January 1, 1994.
(p) The filing of a consolidated tax return by a
controlled group of corporations shall not be permitted.
(q) Section references are to the Internal Revenue
Code, unless otherwise noted.
(r) The
research credit shall be generally allowed for qualified research. Qualified
research is that which is limited to scientific experimentation or engineering
activities designed to aid in the development of a new or improved product, process,
technique, formula, invention, or computer software program held for sale, lease, or
license, or used by the taxpayer in a trade or business. For in-house research
expenses, this trade or business requirement will be met if the principal purpose
for conducting the research is to use the results of the research in the active
conduct of a future trade or business. The research credit shall generally not be
allowed for the following types of activities:
1.
Research conducted after the beginning of commercial production;
2. Research adapting an existing product or
process to a particular customer's need;
3. Duplication of an existing product or
process;
4. Survey or studies;
5. Research relating to certain internal-use
computer software;
6. Research conducted
outside the State of New Jersey;
7.
Research in the social sciences, arts, or humanities; or
8. Research funded by another person (or
government entity).
(See I.R.C. § 41 and regulations thereunder for other
definitions and special rules concerning the research credit.)
(s) The research and expenditure tax
credit is determined as follows:
1. First,
calculate fixed-base percentage. Fixed-base percentage is the percentage which the
aggregate qualified research expenses of the taxpayer for taxable years beginning
after December 31, 1983, and before January 1, 1989, is of the aggregate gross
receipts of the taxpayer for such taxable years.
| Example: | Year | Qualified Research
Expenses | Gross Receipts |
| 1984 | $ 2,000,000 | $ 10,000,000 |
| 1985 | 4,000,000 | 15,000,000 |
| 1986 | 6,000,000 | 20,000,000 |
| 1987 | 8,000,000 | 30,000,000 |
| 1988 | 10,000,000 | 25,000,000 |
| Total | $ 30,000,000 | $ 100,000,000 |
| $ 30,000,000 | = 3% fixed base percentage |
| $ 100,000,000 | |
2. Next,
compute the base amount. The base amount is the average gross receipts of the
taxpayer for the four taxable years preceding the taxable year for which the credit
is being determined (credit year) multiplied by the fixed base percentage.
| Example: | Year | Gross Receipts |
| 1990 | $ 25,000,000 |
| 1991 | 20,000,000 |
| 1992 | 35,000,000 |
| 1993 | 30,000,000 |
| Total | $ 120,000,000 |
| divided by 4 = |
| Average Gross Receipts | $ 30,000,000 |
| Fixed Base Percentage | x 3% |
| Base Amount | $ 900,000 |
3. Then,
compute current qualified research expenses.
| Total Costs | Research Tax Credit |
| Incurred | Qualified Research Expenses |
| Wages | $ 750,000 | $ 500,000 |
| Supplies | 250,000 | 250,000 |
| Depreciation | 100,000 | -0- |
| Overhead | 250,000 | 250,000 |
| Total | $ 1,350,000 | $ 1,000,000 |
| Then compute the research tax credit. | |
| Current year qualified research expenses | $ 1,000,000 |
| Less: Base Amount | (900,000) |
| Total incremental research expenses | $
100,000 |
| Research tax credit % | x 10% |
| New Jersey research tax credit | $
10,000 |
(t) Credit for increased research activities shall
take priority as specified by
N.J.S.A.
54:10A-5.2 4b. If any amount of property or
expenditures is included in the calculation of the research credit, or for which a
credit is allowed, then no such amounts can be allowed for the recycling credit,
manufacturing and employment investment credit, and the new jobs credit.
(u) If taxpayer has research within and outside
New Jersey and cannot determine the amount of New Jersey qualified research expenses
for the period beginning after December 31, 1983, and before January 1, 1989,
calculate the amount to be used in the numerator of the ratio to arrive at the fixed
base percentage as follows: take the figure for qualified research and development
expenses everywhere for the period and multiply it by the average of the average of
the payroll fraction and the property fraction used on the corporation business tax
returns for the corresponding years in question. This amount becomes the numerator
of a fraction whose denominator is taxpayer's aggregate gross receipts everywhere
for the period.
(v) Any Federal
deduction under I.R.C. § 174 will be the same for New Jersey purposes, since
there is no New Jersey provision for a separate modified state tax credit amount
under such circumstances.
(w) For
privilege periods beginning before January 1, 2012, the credit allowable in any
given privilege period cannot exceed 50 percent of the tax liability otherwise due
on the return and cannot reduce the tax liability to an amount less than the
statutory minimum provided in
N.J.S.A.
54:10A-5(e).
(x) For privilege periods beginning on or after
January 1, 2012, the credit allowable in any given privilege period cannot reduce
the tax liability to any amount less than the statutory minimum provided in
N.J.S.A.
54:10A-5(e).
(y) The amount of the tax year credit allowable
that cannot be applied for the tax year due to certain limitations may be carried
over, if necessary, to the seven accounting years 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 allow a
carryover of 15 privilege periods for certain qualifying fields of research
(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).
(z) Credits allowable shall be applied in the
order of the credits' tax years.
(aa)
N.J.A.C. 18:7-3.23 applies only for privilege periods prior to January 1, 2018. For
privilege periods beginning on and after January 1, 2018, the New Jersey research
credit must be calculated pursuant to N.J.A.C. 18:7-3.23A.
(bb) The New Jersey research credit for privilege
periods prior to January 1, 2018, is not refundable because the credit allowed
pursuant to I.R.C. § 41, in effect on June 30, 1992, was not
refundable.
