The New Hampshire Business Profits Tax Return and the Strategic Implementation of the Research and Development Tax Credit

The New Hampshire Business Profits Tax return serves as the statutory filing for business organizations to report their net income and apply for essential offsets like the Research and Development Tax Credit. This credit specifically incentivizes manufacturing innovation by providing a nonrefundable 10% tax reduction based on qualified research wages paid within the state.

The Foundations of New Hampshire Business Taxation and the Role of the Profits Return

The Business Profits Tax (BPT), codified under RSA 77-A, represents the primary income-based levy on entities conducting business within the state of New Hampshire. Unlike many other jurisdictions that rely on a personal income tax, New Hampshire maintains a competitive fiscal environment by focusing on business-level taxation and specialized excise taxes. The BPT return is the vehicle through which corporations, partnerships, and limited liability companies reconcile their federal taxable income with state-specific adjustments.1 Within this regulatory framework, the Research and Development (R&D) Tax Credit acts as a pivotal mechanism for reducing the effective tax burden on companies that contribute to the state’s industrial and technological base.2

The New Hampshire Department of Revenue Administration (DRA) oversees the administration of these taxes, ensuring that business organizations adhere to strict reporting requirements. The BPT return is not merely a record of profit; it is a complex accounting of a firm’s activities, apportioned to the state through a formula that considers sales, and in some cases, payroll and property.4 The integration of the R&D credit into this return requires a dual-stage compliance process: first, an application for the credit itself, and second, the formal claiming of the awarded amount on the annual return via specific credit schedules.5

The Bifurcated Tax Structure: BPT and BET

To understand the BPT return, one must also understand the Business Enterprise Tax (BET) under RSA 77-E. New Hampshire’s tax system is unique because it taxes both profit (BPT) and the value created by an enterprise (BET), which is measured by compensation, interest, and dividends paid.1 The R&D tax credit is strategically positioned to navigate both. It is primarily a credit against the BPT, but any excess amount that cannot be used to offset profits can be applied toward the BET.7 This structure is particularly beneficial for high-growth manufacturing firms that may have significant wage expenses (and thus a high BET) but are not yet generating significant taxable net profits (BPT) due to heavy reinvestment in research.2

Legislative Evolution and Revenue Office Guidance

The Research and Development Tax Credit was enacted during the 2007 legislative session as a targeted effort to bolster the state’s manufacturing sector.5 Since its inception, the credit has undergone several legislative expansions, reflecting the state’s shifting economic priorities and the increasing costs of industrial innovation.

Technical Information Releases and Historical Milestones

The DRA issues Technical Information Releases (TIRs) to provide immediate guidance on legislative changes. These documents represent the department’s official interpretation of the law and are essential for practitioners preparing BPT returns.

The progression from a $1 million to a $7 million aggregate cap indicates the program’s success and the consistent demand from the business community. Despite these increases, the credit remains oversubscribed, leading to the necessity of proration when the total requests from all New Hampshire businesses exceed the annual allocation.2

Defining Qualified Manufacturing Research and Development

The most critical aspect of the R&D tax credit for BPT purposes is the definition of “qualified manufacturing research and development.” New Hampshire law (RSA 77-A:5, XIII) is more restrictive than the federal Internal Revenue Code (IRC) Section 41, creating a narrow lane for eligibility that focuses specifically on physical manufacturing.2

The Manufacturing Nexus

Unlike the federal R&D credit, which allows for research in diverse fields like software, pharmaceuticals, and pure sciences, the New Hampshire credit requires a direct link to manufacturing.2 The statute defines this as services undertaken for the purpose of discovering information intended to be useful in the development of a new or improved manufacturing process or a business component related to manufacturing.3 This excludes businesses engaged solely in services, retail, or non-manufacturing software development unless the software is an integral part of a manufacturing process.2

The “Wages-Only” Restriction

Perhaps the most significant difference between the federal and state R&D credits is the scope of qualifying expenditures. While the federal credit includes costs for supplies, contract research, and cloud computing, the New Hampshire R&D tax credit is strictly limited to wages.2

For the purposes of the BPT return, “wages” are defined as compensation paid or incurred to an employee for services rendered within the state.3 These wages must also meet the criteria for “qualified research expenses” under IRC Section 41(b).3 This means the wages must be paid for:

• Direct Research: Employees physically engaged in experimentation or laboratory work.
• Direct Supervision: Managers who directly oversee the research projects and personnel.
• Direct Support: Technical assistants or equipment maintenance staff directly supporting the R&D activities.2

Wages paid for general administrative functions, human resources, or legal services—even if those services support the company as a whole—are ineligible for the R&D credit.2

The Mathematical Mechanics of the Credit Calculation

The calculation of the New Hampshire R&D credit on the BPT return follows a specific formula designed to reward incremental increases in research spending. The credit is defined as 10% of the “excess” qualified manufacturing R&D wages for the taxable year over the “base amount”.3

Determining the Base Amount

The base amount calculation is where New Hampshire diverges most sharply from federal standards to the benefit of the taxpayer. At the federal level, the base amount cannot be less than 50% of the current year’s qualified research expenses.15 New Hampshire law explicitly overrides this “50% floor,” allowing the base amount to be as low as zero in certain circumstances.2

The formula for the base amount is:

$$Base\ Amount = Fixed\text{-}Base\ Percentage \times Average\ Annual\ Gross\ Receipts\ (Prior\ 4\ Years)$$

2

The Fixed-Base Percentage

The Fixed-Base Percentage represents the historical relationship between a company’s research spending and its gross receipts. For companies that were active during the federal base period (1984–1988), this percentage is locked based on historical data.16 For newer companies, known as “startups” in tax parlance, a graduated scale applies:

• Years 1–5: 3%.2
• Years 6–10: A shifting percentage based on actual historical ratios.
• Year 11 and beyond: Maximum of 16%.2

New Hampshire does not require state-specific adjustments to the gross receipts used in this calculation; businesses use their total taxpayer gross receipts as reported on their federal returns.2

The Per-Taxpayer and Aggregate Caps

Even if a company calculates a massive “excess” amount of R&D wages, the credit is subject to two major constraints. First, no single business organization or unitary group may receive more than $50,000 in credits for any fiscal year.2 Second, the total pool of $7 million is shared among all applicants.2 If the total credit requests statewide equal $14 million, every company’s awarded credit would be reduced by 50% to fit within the $7 million cap.7

The Procedural Lifecycle: From Application to Return

Claiming the R&D credit on a BPT return is a multi-step process that spans several months. Failure to adhere to the strict deadlines set by the DRA can result in the total forfeiture of the credit for that tax year.

Step 1: The DP-165 Application

The journey begins with Form DP-165 (Research and Development Tax Credit Application). This form must be postmarked or submitted via Granite Tax Connect (GTC) by June 30 following the tax year in which the expenditures were made.5

A critical requirement of the DP-165 is the attachment of the Federal Form 6765 (Credit for Increasing Research Activities).5 If the taxpayer has not yet filed their federal return or is on extension, the DRA accepts a “pro-forma” or draft copy of the Form 6765.5 Without this federal form, the state application will be rejected as incomplete.5

Step 2: The Award Notification

The DRA reviews all applications throughout the summer. By July 31, the department sends acknowledgment letters to all applicants.5 The final determination of the award amount—after considering the $50,000 individual cap and the $7 million aggregate proration—is mailed to the taxpayer by September 30.2 This award letter is the legal proof required to claim the credit on the BPT return.5

Step 3: Reporting on Form DP-160

When it is time to file the actual Business Profits Tax return, the taxpayer uses Form DP-160 (Schedule of Credits) to report the awarded R&D credit.6 This form serves as a master schedule for all available credits, ensuring they are applied in the correct statutory order.

On Form DP-160, the taxpayer must:

• Enter the available R&D credit from the award letter.6
• Apply the credit first against the BPT liability.6
• Apply any remaining balance against the BET liability.2
• Calculate any carryforward amount for the next year.6

Integration with Combined and Unitary Filers

For large enterprises operating through multiple entities, the DRA applies the “Unitary Business” principle. A unitary business or an enterprise consisting of more than one taxpayer is considered a single taxpayer for the purposes of the $50,000 R&D credit cap.3

Administrative Rule Rev 306.06

The application of credits to business organizations included in a “Water’s Edge Combined Group” must follow New Hampshire Administrative Rule Rev 306.06.21 This rule requires the combined group to file a separate schedule with their Form DP-160 showing how the credit is apportioned among the individual members of the group who are subject to the BPT.4 This prevents the “double-dipping” of credits and ensures that the total offset does not exceed the group-wide award.22

Prohibited Overlaps: The ERZTC Exclusion

A nuance often missed by taxpayers is the statutory prohibition against using the same wages for multiple state tax credits. RSA 77-A:5, XIII(a)(5) explicitly states that wages for which an R&D credit is taken shall not also be eligible for the Economic Revitalization Zone Tax Credit (ERZTC) under RSA 162-N.2

This requires tax planners to perform a “cost-benefit analysis” during the BPT return preparation. If a company operates in an Economic Revitalization Zone and also conducts manufacturing R&D, it must choose which credit provides the higher value for specific employee wages.2 Since the ERZTC has its own $40,000 cap and specific job-creation requirements, the choice often depends on whether the company is growing its headcount (ERZTC) or increasing its technical research investment (R&D).6

Documentation Standards and Audit Defense

The New Hampshire DRA maintains the right to audit the R&D credit claims reported on a BPT return. Because the state relies on the federal Four-Part Test to define “qualified research,” the documentation requirements are stringent.7

The Burden of Proof

Taxpayers must retain documentation that substantiates the “manufacturing nexus” and the technological nature of the research. Essential records include 7:

• Contemporaneous Lab Notes: Records of experiments, failures, and alternative designs evaluated during the tax year.
• Time Tracking Records: Documentation linking employee hours specifically to the R&D project, rather than general production or administration.
• Prototypes and Test Results: Evidence of the physical components developed and the testing protocols used to eliminate uncertainty.
• Contract Documents: While contract research costs are not eligible for the state credit, contracts may be needed to prove that the company retains the “substantial rights” to the research and bears the “economic risk”.2

Statute of limitations for these audits generally ranges from three to four years, though records should be kept longer if a credit carryforward is being utilized.2

Statistical Insights into Credit Utilization

The New Hampshire Department of Revenue Administration produces an annual Tax Expenditure Report that provides data on the utilization of various credits. These statistics offer insight into the competitive nature of the R&D credit.9

Historically, the demand has consistently outpaced the supply. In years where the requested amount was significantly higher than the cap, the proration factor has dropped as low as 60-70%, meaning that companies often receive less than they originally requested on their DP-165 applications.2 This makes the $50,000 individual cap more of a “ceiling” that is rarely reached after proration for many mid-sized firms.

Case Study: Implementing the R&D Credit for a New Hampshire Manufacturer

To demonstrate the practical application of these rules on a Business Profits Tax return, we will examine the case of “North Country Aerospace Inc.,” a hypothetical manufacturer of specialized drone components based in Berlin, NH.

The Financial Profile

• Current Tax Year: 2024.
• Total Qualified Manufacturing R&D Wages in NH: $1,200,000.2
• Average Annual Gross Receipts (Prior 4 Years): $10,000,000.2
• Fixed-Base Percentage: 4% (established based on historical records).15
• BPT Liability before Credits: $45,000.
• BET Liability before Credits: $60,000.

Calculation Step 1: Establishing the Base Amount

The company must first calculate its state-level base amount. Unlike the federal calculation, North Country Aerospace does not need to worry about the 50% floor of current-year wages.2

$$Base\ Amount = 0.04 \times \$10,000,000 = \$400,000$$

Calculation Step 2: Determining the Excess and Gross Credit

The “excess” is the amount by which current-year manufacturing wages exceed the calculated base.3

$$Excess\ Wages = \$1,200,000 – \$400,000 = \$800,000$$

$$Potential\ Credit = 10\% \times \$800,000 = \$80,000$$

Calculation Step 3: Applying State Caps

The initial application on Form DP-165, filed by June 30, would show a request for the maximum allowable amount per taxpayer.2

$$Requested\ Credit = \$50,000\ (Statutory\ Limit)$$

Calculation Step 4: Proration and Final Award

Upon receiving all applications, the DRA determines that the total statewide requests are $10 million. Since the aggregate cap is $7 million, a proration factor of 0.70 is applied to all awarded amounts.7

$$Final\ Awarded\ Credit = \$50,000 \times 0.70 = \$35,000$$

North Country Aerospace receives an award letter for $35,000 on September 30.

Calculation Step 5: Application to the BPT Return

When filing the annual return, the company uses Form DP-160 to apply the $35,000 award.6

1. BPT Offset: The credit is first applied against the $45,000 Business Profits Tax liability.

• $45,000 (Tax) – $35,000 (Credit) = $10,000 Net BPT Due.

1. BET Application: Since the entire $35,000 was used to offset the BPT, there is $0 remaining to apply against the $60,000 Business Enterprise Tax liability.6
2. Carryforward: Because the total credit was utilized, there is no carryforward for future years.21

This example highlights how even a high-research-spend company is constrained by the $50,000 cap and statewide proration, emphasizing the need for accurate tax forecasting.

The Future of the R&D Credit: Senate Bill 276

The New Hampshire legislature is currently considering Senate Bill 276 (SB 276), which represents the most significant proposed overhaul of the R&D tax credit since 2015.11 This legislation is driven by a desire to keep New Hampshire’s manufacturing sector competitive as neighboring states like Massachusetts and Vermont expand their own technical incentives.

Key Provisions of SB 276

The bill proposes to increase the financial scale of the credit program significantly, effective January 1, 2026.11

The DRA’s fiscal analysis of SB 276 suggests that the increase would reduce business tax revenue by approximately $3 million annually, though it notes the actual impact is “indeterminable” because taxpayer behavior and the timing of carryforward usage are difficult to predict.11 If passed, the first applications under the new rules would be due June 30, 2026.11

Conclusion: Strategic Implications for Business Organizations

The Research and Development Tax Credit is an essential component of the New Hampshire Business Profits Tax ecosystem. For manufacturing firms, it offers a direct and powerful mechanism to lower the total cost of technical labor, thereby encouraging the development of new products and processes within the state. However, the credit’s unique characteristics—particularly its strict “wages-only” focus, its divergence from federal base-amount floors, and its rigorous application timeline—demand proactive and meticulous tax planning.

By understanding the interplay between the BPT and BET returns and staying abreast of revenue office guidance like Rev 306.06 and the evolving legislative landscape represented by SB 276, businesses can ensure they maximize their awarded credits. The BPT return is not just an end-of-year compliance hurdle; it is the culmination of a year-long strategic cycle of application, documentation, and award reconciliation that underpins New Hampshire’s status as a hub for industrial innovation.2

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