What do you do if you’re looking for a way to reduce your company’s tax liability, but you don’t have tax credits? Conversely, what if you have too much credit and not enough tax liability? Well, certain states such as New Jersey, Pennsylvania, and North Dakota will allow you to buy or sell your R&D tax credits. Allowing the R&D credit to be sold benefits the seller, the buyer, and the state allowing the transaction. Just be warned -there are several requirements and limitations on these sales.
Why to Sell R&D Tax Credits
So, the first question is, why would you want to sell your R&D credits after investing the time and effort into earning, calculating, and claiming them? The answer is quite simple – you have more credit than you can use. Whether it is because your R&D credit is substantial or just that you do not generate enough taxable income in that state, having excess credit can be problematic. Without the option to sell or transfer the credit, you would typically be required to carry any excess forward in hope that you can utilize it before it expires. While carrying it forward may make sense for some, it runs the risk of uncertainty that you may never be able to utilize the credit before it expires. Even if you can ultimately utilize the credit, there is value in getting immediate vs. delayed benefit. Selling the R&D credit is an option which allows a company to reap immediate benefit.
Benefits for Buyers and States
For the buyer, the benefit is obvious. You’re getting a credit without doing the hard work. How about the state? What do they get out of this? In general, the R&D credit is viewed by the state as increasing their job (especially tech job) opportunities. What would happen if a company saw they would get no benefit from any investment in that state? By allowing this transfer, the state can provide assurance to the company that, one way or another, they will benefit. Additionally, the company buying the credit is incentivized to have income generating activities in their state. Unfortunately, selling the R&D tax credit is not as simple as it could be.
States have strict rules and filing requirements for both the buyer and the seller before allowing the transfer. For example, New Jersey requirements are:
- The credit selling program is only allotted $75M annually
- The seller must:
- Be a tech or biotech company
- Sell their credits for at least 80% on their value
- Have protected and proprietary intellectual property
- Employ up to 225 full-time employees that live and work in the United States and who receive health care coverage. At least a portion of these employees must live and work in New Jersey
- Have net operating loss carryover and/or R&D tax credits in New Jersey
- Have NO positive net operating income for the last two years
- File Corporate Business Tax returns in New Jersey
- Use proceeds of sale on further R&D expenditures
For Pennsylvania, the rules are:
- The credits may only be sold once
- The seller must:
- File PA state tax returns
- Apply earned credit against current year liability
- Wait until returns are filed and accepted by the PA Department of Revenue
- The buyer:
- Must claim the credit in the year in the which the DCED approves it
- May not resell the purchased credits
- Is limited to offset 75% of their current year liability
While these requirements may be limiting, if you are a company in need of a tax reduction or a company with additional credit, it may be worth looking into whether you meet the requirements. For New Jersey, you should apply on the NJ EDA website, and for Pennsylvania you should apply on the form called ‘APPLICATION TO ASSIGN RESEARCH & DEVELOPMENT TAX CREDITS’, found on the DCED website.
For more information that can help you get navigate the R&D tax credit process, contact us.