Buy/Sell Tax Credits

A record number -- 165 -- of high tech businesses will earn a collective $40 million through New Jersey's unusual Technology Business Tax Certificate Transfer Program, as announced last week by the New Jersey Economic Development Authority. In this program, high tech businesses that are losing money can sell their unused tax credits to profitable businesses for from 75 to 90 cents on the dollar. The buyers save on their taxes and also get to pat themselves on the back for encouraging technology in New Jersey.

A money-losing company that wants to qualify for tax transfer credits 2004 fiscal year must apply on or before June 30, 2003. Such a company must have a new or expanding technology or a biotechnology business with not more than 225 employees and at least 75 percent of its workforce in new Jersey. They can sell their research and development credits or their Net Operating Losses (NOLs) to pay for the purchase of equipment, facility expansions, or to pay salaries. These sellers can apply multiple times for up to a cap of $10 million.

It's as if a minimum wage earner who pays no income tax could sell her deductions to someone in a high tax bracket. Technology companies can take research and development tax credits to offset the nine percent corporate tax, but young companies are so poor they aren't paying that tax. They sell the credit for at least 75 cents on the dollar.

A money-making company that wants to buy this year's tax transfer credits should move very quickly. Half of the buyers are generally retailers and half are in the financial industry, but theoretically any company in any industry could be a buyer. The buyer does not need to be headquartered in New Jersey, though it will have a large tax liability here. The buyer pays at least 75 percent of the value of the credit but gets to take 100 percent off its state tax.

This tax credit program has spawned a niche business for putting the buyers and sellers together. Bruce Deichl founded the Tax Transfer Corporation of New Jersey in Bernardsville (908-630-9575; fax, 908-630-0653, www.taxtransfer.com). A graduate of Notre Dame, Class of 1969, Deichl had worked at Marine Midland Bank, at Thompson McKinnon (a mid-tier brokerage), and for the last half dozen years he took small companies through reverse mergers.

"When I was doing research for one company, I came across the initial proposal for the tax certificate transfer program, saw it was a win/win, and formulated my company the same day," Deichl says.

The first year, he represented 31 of the 61 participating companies. Last year (the third year) he represented 82 of the 118 sellers. "This year already, we have over 80 clients, and it's climbing daily," he says. "This is all we do -- the buy/sell agreements, handling the escrow, executing the contracts, getting the certificates, and handling the closings in each selling company's office. We have never failed to sell a credit in a timely manner."

"Last year we had about 14 buyers, and we did $25 million of the $40 million in credits. At this point we have a number of new buyers. This is the time for buyers to apply, because we are close to selling what we have," says Deichl.

The Division of Taxation rules on the value of the tax loss or tax credit benefit. The Commission on Science and Technology reviews the application for technology qualifications. Eligibility decisions are made by the NJEDA. When a company's application is approved, it gets a certificate showing the value of the tax benefit being exchanged, and this certificate is transferred to the buying company.

For information about the Technology Business Tax Certificate Transfer Program or other financing alternatives from the NJEDA, call 609-292-0187 (www.njeda.com). A list of the companies approved for this year's program was not available at press time but can soon be obtained by calling 609-341-2065. Last year's sellers included Aesgen Inc. on Research Way, Gynetics Inc. on Route 1 in Lawrenceville; Hymedix Inc., the hydrogel/drug delivery company in Dayton; and Morphochem/Small Molecule Therapeutics at Princeton Corporate Plaza. Past buyers for these credits have been the Bank of New York, PSE&G, Tiffany and Company, the New York Times Company, BNY Capital Markets Inc., Comcast Cablevision of New Jersey, and Merrill Lynch Professional Clearing Corp.

"This program serves as a model to other states on how to creatively support high tech companies that require financial assistance to grow their business," says Caren S. Franzini, executive director of the EDA.

"Even with the budget problems," says Deichl, "the government was smart enough to continue an exceptional program that, in the short term and the long term, will help the state.

"The original goal for Governor Whitman," says Deichl, "was to expand our substantial biotech industry and on the tech side to become Silicon Valley East."

A number of companies, such as Integra Life Sciences on Enterprise Drive and Liposome on Research Way, have turned the corner to profitability. Sometimes the turnaround came with an acquisition. "As soon as Liposome turned the corner for instance, they immediately got bought out by Elan," he says, "bringing international recognition to the state."

-- Barbara Fox

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