THE TECHNOLOGY BUSINESS TAX CERTIFICATE TRANSFER PROGRAM 2010 FREQUENTLY ASKED QUESTIONS

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1 THE TECHNOLOGY BUSINESS TAX CERTIFICATE TRANSFER PROGRAM 2010 FREQUENTLY ASKED QUESTIONS These questions and answers are meant to provide general guidance regarding a number of often misunderstood components of the Technology Business Tax Certificate Transfer Program. This information does not constitute legal advice. In July 2009, the New Jersey Economic Stimulus Act of 2009 (Stimulus Act), P.L. 2009, c90, was signed into law, with a revision approved by the Legislature on March 22, 2010, S920/A2059 and signed into law on May 5, The Stimulus Act included changes that impact the TECHNOLOGY BUSINESS TAX CERTIFICATE TRANSFER PROGRAM. If you have any questions or need clarification on any of these questions or answers, please contact John Rosenfeld at or Michael Krug at Summary The Technology Business Tax Certificate Transfer Program enables approved, Technology and Biotechnology Businesses with Net Operating Losses to sell their Unused Net Operating Loss Carryover (NOL) and Unused Research and Development Tax Credits (R&D Tax Credits) for at least 80% of the value of the tax benefits to a profitable corporate taxpayer in the State of New Jersey that is not an Affiliated Business. This allows Technology and Biotechnology Businesses with Net Operating Losses to turn their tax losses and credits into cash to buy equipment or facilities, or for other Allowable Expenditures. The New Jersey Economic Development Authority (NJEDA) determines eligibility, and the New Jersey Division of Taxation determines the value of the tax benefits (NOL and R&D Tax Credits). The new Statute streamlines current eligibility and allocation requirements to enable more companies to participate in the program. Key differences in the program this year are: 1) Eliminate requirements to assess likelihood of future job creation and future decrease in net losses; 2) Eliminate requirement that the applicant not have enough resources to operate in the shortterm; 1

2 3) Eliminate requirement that the applicant s technology is viable and that the applicant has a competitive advantage; 4) Revise the requirement of having a net loss for each of the last 2 years to having a net operating loss on its financial statements for each of the last 2 years which will no longer penalize companies that show a small profit due to the sale of the NOL in a prior year; 5) Add a permanent, full-time New Jersey employment requirement based on the number of years the applicant has been incorporated; 6) Add a requirement that the applicant offer a group health care plan to its employees; 7) Authorize the reallocation of any unused portion of the $10 million set aside for innovation zone companies to be used by non-innovation zone companies; and 8) Increase the maximum company lifetime value of surrendered tax benefits from $10 million to $15 million. ELIGIBILITY: Q. My non-technology/non-biotechnology business has a Net Operating Loss in each of the last two years. May we sell our NOL s in this Program? A. No. Only Technology and Biotechnology Businesses whose primary business involves the provision of a scientific process, product or service may participate in this Program. Please refer to the definitions of Biotechnology Business and Technology Business on pages 12 and 13 of the application respectively. Q. Our financial statements show a small positive net income this year, as a result of selling NOL s last year, but we continue to have a net operating loss. Can we still sell our NOL s? A. Yes. The 2009 Economic Stimulus Act changed the loss measurement from net loss to net operating loss. The difference is that net operating loss is more indicative of your actual day to day operations as it takes into account your business revenues and costs. You are no longer penalized for selling prior year NOLs or for having a one time, non-recurring gain on the sale of an asset. Q. Our financial statements show a small positive net operating income this year, but our tax return produces a New Jersey Net Operating Loss which we would like to sell. May we do so? A. No. Though the New Jersey Net Operating Losses are what is typically sold in this Program, one of the core eligibility requirements to participate in the Technology Business Tax Certificate Transfer Program is that the business not have positive net operating income on any of its last two full-year Income Statements as per GAAP.. 2

3 Q. The application indicates I must employ 10 full-time employees in NJ as of June 30 th, 2010, and at time of closing, as I incorporated more than 5 years ago. What if I meet the employment criteria on June 30 th, 2010 at time of filing the application, but go below that number after I file the application? Will I still be able to sell my NOLs or R&D credits in December 2010? A. No. If the number of full-time employees goes below the minimum required number for the years since you incorporated, after you submitted the application on June 30, 2010, and there is no increase to meet the minimum requirements by the time of closing, you will not be allowed to sell your NOL or R&D credits. Please keep in mind, employment numbers will be verified by the N.J. Division of Labor and Workforce Development. Q. I have participated in the NOL program and sold tax benefits for the past 4 years. The last two year s I have shown a net operating income on my financial statements. Can I still qualify to sell my credits based on the original approval, 4 years ago? A. No.. Under the New Jersey Economic Stimulus Act of 2009 no applicant will be grandfathered to carry forward NOL or R&D tax credits for the purpose of the Technology Business Tax Certificate Transfer Program. In the current application submission cycle, to be submitted by June 30, 2010, all applicants will be judged as new applicants, and must meet all the eligibility criteria. Q. How does a company find buyers of the NOL benefits? A. We are currently revising our list of purchasers to reflect many of the buyers of the tax credits in We anticipate it should be posted on our website, in early July Q. We are a pharmaceutical company registered as an LLC; do we qualify if we have a net operating loss? A. We suggest you consult with your tax department or Auditors to confirm if the tax liability is reported by the company or passed through to the members. The tax implications of an LLC differ from those of corporations. LLCs typically use "pass-through taxation," which means the LLC does not pay taxes. Income from the business is instead passed down to the company's owners, who are called members in LLCs. The members claim the profits or losses on their personal tax forms. Single-owner LLCs pay taxes on Form1040 with the Internal Revenue Service. Partnership LLCs, in which there is more than one owner, must file partnership returns using Form Q. How do you enforce the recapture after a company leaves the State? A. We will contact the company to inform them of the recapture amount and make arrangements for the repayment to NJ. If the applicant is not cooperative, the account will be turned over to our collection group and the Attorney General s office for further action. 3

4 Q. Is the deadline for receipt of the application by the NJEDA still 6/30/10? If so, when do you expect the application to be available? Is the application expected to be similar to last year? A. The application deadline of June 30, 2010 will remain the same as it is set by the Statute. The application is posted on our website, GENERAL QUESTIONS: Q. In the past I understand the NJ Legislature allocated $60 million to The Technology Business Tax Certificate Transfer Program that can be sold by high tech and bio tech companies. Will the allocation be impacted by New Jersey s fiscal situation. A. Yes. Governor Christie has requested the legislature reduce the amount of NOL & R&D tax credits to be available for sale from $60 million to $30 million. We will not know the final number until the Legislature submits the budget to the Governor for his approval. The Legislature is required to submit the budget by June 30, The final allocation will impact how much is allocated to the Innovation Zones and the General Pool. Q. Does the new legislation address pre-existing approved losses? A. Yes. No applicant will be grandfathered going forward for prior approved NOL or R&D losses. Many of the formerly grandfathered applicants had benefited from the program and no longer qualify under the new statute and proposed regulations. Q. Can the Authority consider new information about the project developed after the June 30 submission deadline? A. No. June 30 th is the deadline for receiving a complete application with all requested attachments. Please note, per the Authority s published Regulations (N.J.A.C. 19: (d)), the Authority cannot consider any new information about the project that occurred after the June 30th submission deadline. During the review process we may contact you or your consultant to clarify information submitted on events that happened prior to June 30, INTELLECTUAL PROPERTY: Q. We have intellectual property but it is not formally protected. Is there a need for the intellectual property to be protected? A. Yes. This program defines protected proprietary intellectual property as a patent, or registered copyright. An application for a patent is sufficient for demonstrating that the intellectual property is protected. The protected proprietary intellectual property must also be directly related to the applicant s primary business of providing a scientific process, product, or service. 4

5 Q. Is a Trademark or unregistered copyright considered to be proprietary protected intellectual property? A. No, a Trademark is no longer considered an acceptable form of protected proprietary intellectual property for this program. A copyright must be registered with the Library of Congress. Q. We are not the originator of the protected proprietary intellectual property, but license the technology from the originator. Is this license satisfactory to demonstrate ownership of protected proprietary intellectual property? A. Yes, as long as the protected proprietary intellectual property is directly related to the applicant s primary business of providing a scientific process, product, or service. The license agreement from the patent owner to the Technology/Biotechnology Business must be included with the application prior to the June 30 submission deadline and still remain in effect. The license agreement must state that it is granting a license and that the license authorizes the applicant to control all aspects of the protected proprietary intellectual property. License shall not include an agreement, such as an exclusive distribution agreement or similar business arrangement that is not registered with the U.S. Federal Government, such as the U.S. Office of Patents, and does not grant the applicant control of the protected proprietary intellectual property. FINANCIAL STATEMENTS: Q. We have never engaged an independent CPA firm to prepare our financial statements. Do we need to do so to participate in the Program? A. Yes. It is a requirement of the Program that each applicant have financial statements that were compiled, reviewed, or audited by an independent CPA firm. These financial statements should be prepared according to GAAP and should also contain footnotes. Q. We do not have our own financial statements prepared; rather, our parent company has audited financial statements which include our results in Consolidated Statements (but not Consolidating Statements). Do we need to have our own financial statements prepared by an independent CPA firm too? A. Yes. The financial statements of the applicant AND the financial statements of all parent companies are required. All the financial statements must be compiled, reviewed, or audited by an independent CPA firm. If the parent company s financial statements contain Consolidating Statements which display the individual results of the applicant AS WELL AS the parent, that will satisfy the requirement for both the applicant s and parent company s financial statements. Q. The application requires that we submit our two most recent years of independent CPA prepared financial statements. Though we had independent CPA prepared financial statements in the past, we have only done internal statements for the past several years. Should we send in the independent CPA prepared financial statements even though they are several years out of date? 5

6 A. No. You need to send in independent CPA prepared financial statements for the prior two most recent full years of operations (except as set forth in the following Answer). Q. We have not had independent CPA prepared financial statements for the two most recent years. We can have our most recent financial statements prepared by an independent CPA and can send in the prior year s internal financial statements. Does this satisfy the requirement? A. Yes. If the two most recent years of financial statements were prepared by an independent CPA, they are required to accompany the application. If the financial statements were ONLY done internally in the past, we need to receive the most recent years financial statements prepared by an independent CPA and will accept the internally prepared financial statements for the two immediately preceding years. If any of the most recent two years of financial statements were prepared by an independent CPA, they are required to accompany the application. EMPLOYMENT: Q. I noticed the Economic Stimulus Act revised the job eligibility requirement to a minimum number of full-time employees working in NJ based on the number of years since earliest incorporation (including predecessor entities.) What are the new requirements? A. The following chart indicates the minimum number of full-time employees a company must employ in NJ, based on the year of incorporation. If the applicant acquired an older company, we will base the minimum job requirement on the older date. Less than three years 1 full-time employee More than three years, less than five years 5 full-time employees More than five years 10 full-time employees Q. We are related to another entity. Do we need to count the employees of the related entity to satisfy the requirements regarding the maximum number of employees (224 employees in the U.S.)? A. Yes. You must include in the count toward the maximum number of U.S. employees (224) the U.S. employees of all affiliates and subsidiaries as shown on your consolidated financial statements. The 224 maximum employee count includes U.S. employees of any company that owns or controls at least (50%) of the applicant and the U.S. employees of any consolidated group of affiliated corporations as filed for federal income tax purposes. The total number of these U.S. employees must not exceed 224. Q. The application indicates a need to include our Federal W-3 form. We do not have a Federal W-3 Form to include with our application. Is there anything else that may be sent in lieu of a Federal W-3 Form? A. Yes. If your Federal W-2 Form is filed electronically, the Federal W-3 Form would not need to be filed with the Social Security Administration. In this instance, we will accept a Federal W-2 summary or a Federal 941 Annual Summary as long as the alternative Form displays the total number of W-2 Forms issued. 6

7 Q. The application indicates a need to include our New Jersey State W-3 form. We do not have a New Jersey State W-3 Form to include with our application. Is there anything else that may be sent in lieu of a New Jersey State W-3 Form? A. No. The New Jersey State W-3 Form (NJ-W-3M) must be filed by every New Jersey business and should always be submitted with the application. Q. All of our employees are leased from a Professional Employment Organization (PEO). The PEO files its W-2's in the aggregate for all of its employees including ours. Do we still need to send in the required W-3 statements? A. No. However, the PEO must write a letter on your behalf indicating the total number of employees it leased to you as of December 31, 2009, the number of employees currently employed, and anticipated to be employed for your benefit on June 30, Please keep in mind the PEO will need to submit the IRS form 941, payroll tax report as soon as possible for the quarter ended June 30, The PEO will need to include the State in which those employees are located. In addition, the PEO will be required to send the IRS Form 941 for the quarter in which the tax benefits are sold, typically December 31, Q. I noticed in the application that I must provide health insurance for all my full-time employees. What if they decline the coverage because they are covered by their spouse, or significant other s health insurance plan. Can I still apply to the program? A. Yes. The key is that you must have available and offer all your full-time employees healthcare coverage. If they decline your coverage because a spouse or significant other s employer covers them, have them submit a letter or other company form indicating it has been offered and they declined the healthcare coverage. Q. What happens if I sell my company and the new parent company decides to move our business out of NJ? A. Under the Stimulus Act of 2009 if an applicant company that benefits from the program does not remain in NJ for 5 years after receiving the private assistance, or fails to maintain a headquarters or a base of operation in the State, the seller must forfeit and payback its proceeds to the State. The Authority will allow the selling business to retain 20% of the face value of the tax credit certificate for each full year the business remained in New Jersey, Move within Recapture Percentage of the NOL Allocation 1 year of disbursement 100% 2 year of disbursement 80% 3 year of disbursement 60% 4 year of disbursement 40% 5 year of disbursement 20% 7