The state of New Jersey is committed to growth and development of its local economies through a variety of solutions including exemptions, incentive grants and tax credits. One of these credits, the Manufacturing Equipment Tax Credit, is based on a business’ investment in capital and people. Given certain requirements, corporate taxpayers can maximize this tax credit against their corporate tax liability over a three-year period.
The two-prong approach to this credit is based on qualified equipment investment in the first year and increases in the average qualified employees in years two and three.
Qualified equipment is defined as:
- Machinery, apparatus, or equipment acquired by purchase
- A minimum useful life of four years
- Placed in service in New Jersey
- Use or consumption must be for the production of tangible personal property by
- Manufacturing
- Processing
- Assembling, or
- Refining
Additionally, this credit is available for qualified equipment acquired for the generation of electricity or thermal energy.
As mentioned above, the first-year portion of the credit is based on the qualified investment. The amount of the credit is 2% of the investment credit base (4% of the cost for certain taxpayers), up to a maximum credit of $1 million. The investment credit base is the cost of the qualified equipment, subject to exclusions of certain acquisitions.
The employment investment credit portion is achieved in the two years following the qualified investment. The credit is $1,000 per the increase in the average number of qualified employees, limited to 3% of the investment credit base established in year one. The average number of qualified employees is determined by:
- New Jersey domiciled residents
- Wage rate no less than the federal or state minimum wage rate
- Full-time employees
- Defined as working a minimum of 140 hours per month, or
- Full-time equivalents defined as the aggregation of part-time employees working at least 20 hours per week for a minimum of 6 months during the tax year
In a given year, the limitation on the use of these credits is 50% of the corporate tax liability and cannot reduce the tax below the statutory minimum. However, any unused credits, while not refundable, can be carried forward to the seven succeeding tax years. There are additional limitations on the use of these credits in corporate acquisitions, as well as claw-back provisions for the disposition of the qualified investment equipment.
For growing manufacturing companies, this credit can provide significant benefit, helping spur additional growth and investment. To learn more about how Withum can assist you with this credit or other state incentives, please fill out the form below.
Author: Shawn Henderson, CPA | [email protected]
Tax Services
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