Date: July 21, 2023Attorney: Martin D. Hauptman

In a notable move for businesses operating in New Jersey, the state’s Division of Taxation has recently introduced a new law that affects the timing of tax deductions for research and development (R&D) expenditures. The amendment, which is part of L. 2023, A5323 (c. 96), will impact tax years ending on or after January 1, 2022. Let’s delve into the details of this update and understand how it can benefit corporations in the state.

New Jersey Research and Development Expenditures – Changes in Deduction Timing:

The amended N.J. Rev. Stat. § 54:10A-4(k)(11) introduces a significant change for businesses claiming the Corporation Business Tax Research and Development Tax Credit for New Jersey qualified research expenditures. Starting from January 1, 2022, eligible taxpayers can now deduct their New Jersey expenditures in the same year as they claim the credit. This stands in contrast to the previous requirement, where such expenditures were amortized as mandated by federal tax regulations.

Simplified Recording of Deductions:

With this recent amendment, eligible businesses can benefit from a more straightforward process to record their deductions. They are required to list the relevant amounts as other deductions on Schedule A, Part II of their tax returns. This streamlined approach allows corporations to enjoy more immediate tax benefits for their research and development activities, freeing up resources to reinvest in innovation and growth.

Amended Returns for Improved Deductions:

The new law also provides relief for businesses that had previously amortized their New Jersey qualified research expenditures on their 2022 Corporation Business Tax return. Such taxpayers are allowed to file an amended return, enabling them to take advantage of the revised regulations and avail the benefits of upfront deductions.

Focus on New Jersey Qualified Research Expenditures:

It is important to note that this provision solely pertains to New Jersey qualified research expenditures. For businesses with non-New Jersey qualified research expenditures, the existing deduction rules remain consistent with federal purposes. Consequently, businesses must accurately classify their expenses to ensure they adhere to the appropriate deduction guidelines.

The recent amendment to the timing of New Jersey research and development expenditure deductions holds promising implications for businesses in the state. By allowing upfront deductions for qualified research expenses, the New Jersey Division of Taxation aims to incentivize and support corporate R&D initiatives. This move is expected to stimulate innovation, foster economic growth, and create a more favorable environment for businesses to flourish.

As always, businesses should stay well-informed about tax laws and regulations to optimize their benefits while remaining compliant. Seeking advice from tax professionals can help ensure a comprehensive understanding of the amended rules and their specific implications for each business’s financial situation. By leveraging these tax benefits, corporations in New Jersey can take a stride forward in their pursuit of innovation and prosperity. (Source: Timing of New Jersey Qualified Research Expenditures, N.J. Div. of Taxation, 07/10/2023.)