Have Your Taxes Done? Have Operating Losses? IP? Then This NJ EDA Program Could Be For You

[In an email interview, NJTechWeekly.com asked Kathleen Coviello, Director of the Technology & Life Sciences Division of the New Jersey Economic Development Authority, to discuss the state’s Net Operating Loss program, formally known as the “Technology Business Tax Certificate Transfer Program.” The program appears to be underutilized, and in the past Coviello has said that New Jersey tech and life sciences companies are “leaving money on the table” by not participating. The deadline to apply for 2016 is June 30 and approximately $60 million in funds will be allocated for the program.]

Can you explain what the Net Operating Loss (NOL) program is, in your own words, so that a layman can understand?

The program enables eligible companies to sell their New Jersey net operating losses (NOLs) and/or research-and-development (R&D) tax credits to unrelated profitable corporations for cash.

The program’s goal to help early-stage, product-based companies in technology and life science industries grow and create jobs in New Jersey.

This innovative program has provided hundreds of New Jersey companies with access to capital that is vital to their continued growth in the state.

[Additional information is available on the program’s website (www.njeda.com/nol).]

Can you provide an example of a company that has successfully used the program?

MYOS Corporation, a biotechnology company located in Cedar Knolls that focuses on the discovery, development and commercialization of products that improve muscle health and reduce frailty, benefitted from the NOL program in fiscal year 2015. 
   
Joseph DosSantos, CFO of MYOS, commented, ‘This is the first year that MYOS has participated in the State of New Jersey’s Technology Business Tax Certificate Transfer Program, which is a state initiative designed to spur innovation and job creation by assisting promising early-stage technology and biotech businesses.  MYOS will use the funds to continue discovery, development and commercialization of products that improve muscle health and function essential to the management of sarcopenia, cachexia and degenerative muscle diseases.” 

DosSantos continued, “MYOS is pleased to participate in this program, and extremely grateful to the New Jersey Economic Development Authority for its consideration.  Programs similar to this one make it possible for emerging biotherapeutic companies like MYOS to thrive in New Jersey.”

You told me that New Jersey tech companies are leaving money on the table by not applying for the NOL program. Can you explain?

Companies that are profitable can offset their New Jersey State taxes with their NOLs and R&D tax credits. Companies that are not yet profitable must wait until they are profitable in order to take advantage of this benefit.  If they never turn a profit, the benefit is lost.

New Jersey’s NOL program allows an eligible company to leverage this unused benefit by selling it for cash today, when cash is a much sought-after commodity for young, emerging technology companies.

As they wait, the benefit sits on their books, decreasing in value, with the possibility of never being utilized. Of course, participating in the NOL program is a business decision for a company. But a company must seriously consider whether it’s in its best interests to wait or to receive the cash now.  

And the good news is entrepreneurs don’t have to give up any ownership or equity in their businesses in order to participate, which they would have to do if taking on outside investors. 

Is NOL restricted to companies that have intellectual property? And if so, why?

Yes. Per the requirements of the program, an eligible company must own, have filed for, or have an exclusive license to use protected, proprietary intellectual property (defined as a patent or a registered copyright), as the program was designed to foster product-centric companies that are creating and/or growing a unique technology.

How many employees can a company have? And why is it restricted in this way?

To be eligible, a company must have fewer than 225 U.S. employees (including the parent company and all subsidiaries), as well as a minimum number of employees based on the number of years the company has been in existence. This rule is in place in order to keep the program focused on the goal of growing small, early-stage companies that show some modest job growth in the state.

Do companies have to stay in New Jersey for any length of time after they receive the money?

Yes.  Companies must stay in New Jersey for five years after receiving NOL funding.  If a company leaves earlier than that, it will have to repay the state. The amount of repayment is tiered based on the amount of time between the company’s receipt of the benefit and its departure from New Jersey.

What kind of paperwork is required to apply?

The application is completed online. Some documentation will have to be attached to a company’s application. A sample application, along with a full list of required documents, can be found on the program’s website. A company is required to have an accountant prepare a year-end financial statement.  All other paperwork is internal to the business, and should not be difficult to produce and attach to the application.  

Would a company need the help of an accountant to complete the application?

No, a company can complete an application on its own, and many do.  However, a company must have a year-end financial statement created by an outside, independent CPA firm according to US GAAP regulations in order to be eligible for the program.

How much does the application cost?

The program has an application fee of $2,500. Paying the fee via credit card is the last step before submitting the application online.

Why do you think so many New Jersey technology companies don’t apply?

The cost to start a company has decreased significantly, so companies aren’t generating losses as rapidly as they did in the past. In addition, New Jersey has made favorable changes to its tax laws that have reduced tax liability and increased the carry-forward provision for losses.

What kinds of companies buy the NOLs?

A variety of companies buy the operating losses — from large utilities to middle-market retailers to smaller technology companies. Any company looking to reduce its New Jersey tax liability is a potential buyer.

See also: 16 NJ Tech Firms Take Advantage of 2015 Business Tax Certificate Transfer Program