Life Science Industry: Selling New Jersey NOLs and the R&D Credit
The number of life science companies that operate in New Jersey increase continually. Undoubtedly, most of these companies operate “in the Red” for many years, relying on friends, family, and solicited funding for financial support. For these life science companies, an additional avenue for funding exists through the selling of NJ NOLs and R&D tax credits pursuant to the Technology Business Tax Certificate Transfer Program (the “Program”).
Eligibility for the Program is determined on an annual basis, which includes requirements such as including business type, income limitations, and employment minimums. Only companies that meet the NJEDA’s definition of a technology or biotechnology business can participate in the Program. Additionally, applicants cannot show positive net operating income in either of the two previous full years as determined by the financial statements, which must be prepared in accordance with GAAP. The final step of determination is based on a minimum number of NJ full-time employees at both due date of the annual application and the time of the tax attribute sale, which is driven by the age of the company.
Once eligibility is determined, applications for the Program can be completed. These applications become available annually on April 30th and are due by June 30th, as well as by the applicant’s corporate business tax return. If approved, companies can begin selling the tax benefits November 30, and all transactions must be completed by April 15th of the following year.
The tax benefits available for sale include a company’s unused carryover NOLs (subject to a tax benefit calculation), and its carryover research and development tax credits. The value of the NOL tax benefit is the unused NOLs multiplied by the state allocation factor multiplied by the state corporate tax rate. The annual benefit is limited to the unused NOL tax benefit and R&D tax credits that the seller has requested to transfer on the Program application. The Program is authorized an annual allotment of $60,000,000 of tax benefits, of which $10,000,000 is specifically allocated within three identified innovation zones.
The Program was designed to help stimulate and encourage the extension of private financial assistance to biotechnology and technology companies. As part of the approval process, the purchasing corporation cannot be affiliated with the selling corporation, and must enter into a written agreement with the selling corporation detailing the terms and conditions of the private financial assistance for the tax benefits. Those tax benefits sell at a discount, which is negotiated between the purchaser and seller, and cannot be less than 80% of the tax benefit value.
Once the sale has occurred, the amounts received must be utilized on allowable expenditures. Allowable expenditures are costs that are incurred in connection with the operation of the new or expanding emerging technology or biotechnology business in the state, including, but not limited to: expenses of fixed assets, such as construction, acquisition and development of real estate; materials; start-up; tenant out-fit; working capital; salaries; and research and development expenditures. If the receiving corporation does not use the funds appropriately, the tax benefit transfer certificate will be forfeited, and the company will be required to remit the face value. Additionally, if the selling corporation does not maintain operations in NJ during the five subsequent years following the sale of the tax benefits, with the exception of a corporate liquidation, a portion of the face value of the tax benefit certificate will be required to be repaid.
The benefits of this program should be reviewed by eligible life science corporations that incur a magnitude of expenditures throughout all stages of the developmental process. Funding these expenditures for ongoing operations can be challenging, but through the Technology Business Tax Certificate Program, the State offers unprofitable corporations another avenue for funding. The Program is designed to mutually benefit both corporations involved in the transaction, as purchasers received tax benefits at a discount, while sellers received cash for unused NOLs and R&D tax credits.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
