Strategic Analysis of Overpayments and Credit Application within the New Hampshire Research and Development Tax Credit Framework

Overpayments after applying credits represent the surplus of a taxpayer’s cash payments over their net tax liability once nonrefundable credits have reduced that liability to its minimum. While the New Hampshire Research and Development credit is nonrefundable and cannot be directly converted into a check, its application frequently results in a cash refund by offsetting the tax debt that would have otherwise consumed the taxpayer’s estimated payments.

The Structural Foundation of New Hampshire’s Dual Business Tax System

To understand the mechanics of overpayments in the context of the New Hampshire Research and Development (R&D) tax credit, one must first navigate the complexities of the state’s unique dual-tax architecture. Unlike the majority of jurisdictions in the United States that rely on a single corporate income tax, New Hampshire utilizes two distinct but interconnected levies: the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). This two-pronged approach creates a multi-layered environment where credits do not merely reduce a single tax bill but move through a hierarchical sequence that determines the final cash position of the reporting entity.1

The Business Profits Tax, codified under RSA 77-A, is a traditional income tax assessed on the taxable business profits of organizations conducting business activity within the state. This tax has historically been one of the primary drivers of the state’s general fund revenue, originating in 1970 as a replacement for municipal property taxes on stock-in-trade and machinery.1 For the taxable period ending December 31, 2023, the BPT rate was adjusted to 7.5%, reflecting a continued legislative trend of incremental reductions from a high of 9.56% in the early 1980s.1

In contrast, the Business Enterprise Tax, established under RSA 77-E in 1993, is assessed on the “enterprise value tax base,” which is the sum of all compensation, interest, and dividends paid or accrued by the business enterprise. The current rate for taxable periods ending on or after December 31, 2022, is 0.55%.1 The BET functions essentially as a value-added tax on the inputs of production, ensuring that all businesses contributing to the state’s economy pay a baseline tax, regardless of whether they realize a net profit. A critical feature of this system is that the BET paid is allowed as a credit against the BPT liability, a mechanism known as the “cascading credit”.1

Historical and Current Tax Rate Evolution

The legislative history of these taxes reveals a deliberate effort to maintain competitiveness through rate reductions. The BPT, which stood at 8.5% in 2015, has seen several reductions to reach its current 7.5% level.3 Similarly, the BET rate has moved from 0.75% down to 0.55%, with future proposals such as HB 15 aiming for a 0.50% rate.4 These changes are central to the calculation of overpayments because a lower tax rate reduces the amount of liability available to be offset by the R&D credit, potentially increasing the amount of credit that must be carried forward rather than resulting in an immediate overpayment of cash.7

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Legal Framework and Definition of the New Hampshire R&D Tax Credit

The New Hampshire Research and Development Tax Credit, authorized by RSA 77-A:5, XIII, is a nonrefundable tax credit designed to incentivize manufacturing innovation. The credit is specifically targeted toward qualified manufacturing research and development expenditures made or incurred during the fiscal year.9 Unlike the broader federal research credit under Internal Revenue Code (IRC) Section 41, the New Hampshire version is narrowly defined, focusing almost exclusively on wages paid to employees.9

Qualified Manufacturing Research and Development Expenditures

Under RSA 77-A:5, XIII(b), qualified expenditures are defined as wages paid to an employee for services rendered within the state. These services must be undertaken for the purpose of discovering information intended for the development of a new or improved manufacturing process or business component.9 The definition requires that these wages:

1. Qualify as a credit under Section 41 of the Internal Revenue Code.
2. Are reported by the business organization in the enterprise value tax base under RSA 77-E.
3. Are attributable to New Hampshire activities.9

The restriction to “manufacturing” processes distinguishes the New Hampshire credit from those in states like Iowa or Maryland, which may allow a broader range of research activities.15 In New Hampshire, software development, for instance, only qualifies if it is integral to a manufacturing process.9

Calculation Methodology and the “Base Amount”

The credit is calculated as 10% of the excess of qualified manufacturing R&D expenditures over a “base amount”.9 The state defines the base amount using the federal methodology found in IRC Section 41, which typically involves a fixed-base percentage multiplied by the average gross receipts of the preceding four years.10 However, New Hampshire provides a unique advantage: the minimum base amount may be zero.9 This allows startups or companies with high research intensity but little historical revenue to capture a larger credit than they might under federal rules, which often impose a “floor” on the base amount.10

$$\text{Preliminary Credit} = 0.10 \times (\text{Qualified NH Wages} – \text{Base Amount})$$

The final credit amount awarded to an individual taxpayer is subject to two primary constraints: a per-taxpayer cap of $50,000 per fiscal year and a statewide aggregate cap of $7,000,000.9 If the total requests from all qualifying businesses exceed the $7 million limit, the Department of Revenue Administration (DRA) must reduce all awards proportionately.9

The Administrative Lifecycle: From Application to Award Letter

The process of securing the R&D tax credit involves a rigid calendar of deadlines and administrative milestones that are independent of standard tax return filings. This separation is crucial for business organizations to manage their cash flow and anticipated overpayments.12

The Application Process (Form DP-165)

Taxpayers seeking the credit must file Form DP-165, the Research and Development Tax Credit Application, no later than June 30 following the taxable period during which the expenditures were made.9 Because many businesses have not yet finalized their federal returns by June 30, the DRA permits the submission of a pro-forma or draft copy of Federal Form 6765.13 Failure to include this form, even in draft status, results in an incomplete application and disqualification from that year’s funding pool.13

The Adjudication Period and Proration

Following the June 30 deadline, the Department enters a review phase. By July 31, the DRA issues acknowledgment letters to all applicants.13 The critical date for financial planning, however, is September 30. By this date, the Commissioner must determine the final awarded amount for each taxpayer after accounting for the $7 million statewide cap.9

If total valid requests reach $10 million, for example, each taxpayer would receive only 70% of their requested credit. This proration is a consistent feature of the program, as demand has routinely approached or exceeded the available funds since the cap was increased to $7 million in 2017.10 Once the award is finalized, the taxpayer receives an official Award Letter, which serves as the supporting documentation required to claim the credit on their tax return.13

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Mechanics of Credit Application: The Hierarchy of Offset

The New Hampshire R&D tax credit is not applied at the discretion of the taxpayer; rather, it follows a mandatory “hierarchy of offset” established by law. This sequence determines which tax liabilities are satisfied first and how much “surplus” credit remains to be carried forward or to contribute to a cash overpayment.10

Primary Offset: Business Profits Tax (BPT)

The first step in utilizing the awarded R&D credit is to apply it against the Business Profits Tax liability for the taxable period. This application is reported on Form DP-160, the Schedule of Credits.22 The credit used against the BPT cannot exceed the current period’s liability, meaning it can reduce the BPT to zero but cannot, on its own, create a negative tax balance.21

Secondary Offset: Business Enterprise Tax (BET)

If a portion of the credit remains after the BPT liability has been fully offset, that remainder may be applied against the Business Enterprise Tax liability.10 This secondary application is vital because the BET is often the more predictable tax for businesses with high payroll (compensation) but low net profits. By allowing the credit to flow from BPT to BET, the state ensures that the incentive reaches a wider range of manufacturing entities.12

Managing the Carryforward

Any unused portion of the credit—meaning the amount of the award that exceeds the sum of the BPT and BET liabilities—may be carried forward for five subsequent taxable periods.9 It is essential to distinguish between a “credit carryforward” and an “overpayment carryforward.” A credit carryforward is a tax attribute that can be used to reduce future tax bills, whereas an overpayment carryforward is actual cash that was paid to the state and is being held to satisfy future liabilities.22

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Defining “Overpayments after Applying Credits” in the New Hampshire Context

The phrase “Overpayments after Applying Credits” specifically refers to the financial state of a taxpayer’s account on the Form BT-Summary after the nonrefundable R&D credit has been applied to the underlying liabilities. In New Hampshire, the credit itself is nonrefundable, meaning the DRA will never write a check to a taxpayer simply because they were awarded a $50,000 R&D credit if they have no tax liability.10 However, the credit frequently results in an overpayment by liberating cash payments previously made by the taxpayer.26

Reconciliation on the BT-Summary

The BT-Summary is the final page of the business tax return where the taxpayer aggregates their BPT and BET liabilities and compares them to their total payments.26 The process works as follows:

1. Determine Net Tax Liability: The taxpayer calculates their total BPT and BET and subtracts the R&D credit (and any other credits) as determined on Form DP-160. This result is entered on Line 1 of the BT-Summary.26
2. Aggregate Total Payments: The taxpayer sums their quarterly estimated payments, any payment made with an extension (Form BT-EXT), and any overpayment carried forward from the prior year. This is entered on Line 2 of the BT-Summary.26
3. Identify the Overpayment: If Line 2 (Total Payments) is greater than Line 1 (Net Tax Liability), an overpayment exists.26

This overpayment is comprised of actual cash—dollars that the taxpayer sent to the state in anticipation of a tax liability that was subsequently reduced or eliminated by the R&D credit. Because the credit “paid” the tax, the cash is no longer required and is considered an overpayment.26

Local Guidance on Handling Overpayments

According to the New Hampshire Department of Revenue Administration instructions for the BT-Summary, a taxpayer who has an overpayment on Line 6 has two primary options:

• Credit toward Next Year’s Tax: The taxpayer may elect to apply all or part of the overpayment to the subsequent year’s estimated tax liability (Line 7a).26
• Request a Refund: The taxpayer may request that the remainder of the overpayment be refunded as a check or electronic transfer (Line 7b).26

If the taxpayer fails to complete Line 7a, the state’s default procedure is to refund the entire overpayment.26 This mechanism is the only way for a “nonrefundable” credit to effectively result in cash-in-hand for the taxpayer.27

The “Cascading” Credit Complexity: BET vs. BPT Interactions

A nuanced understanding of overpayments requires an analysis of how the R&D credit interacts with the Business Enterprise Tax Credit (BET Credit) against the BPT. In New Hampshire, the BET paid is allowed as a credit against the BPT.1 However, if a taxpayer uses an R&D credit to reduce their BET liability, they are also reducing the amount of “BET paid” available to offset their BPT.5

Cascading vs. Non-Cascading Credits

The DRA distinguishes between “cascading” and “non-cascading” credits in its Tax Expenditure Reports.5 A cascading credit is one where the credit used to offset the BET liability is still considered “taxes paid” for purposes of the credit against BPT. The R&D credit, however, is generally non-cascading in its direct application.5

When a taxpayer applies the R&D credit to reduce their BET, the remaining BET liability (the portion they must pay in cash) is what becomes the credit against the BPT. This interplay can create a “balancing act” for tax preparers. If the R&D credit is used to reduce the BET, it may indirectly increase the net BPT liability because there is less of a BET credit to offset it. This is why the law requires the R&D credit to be applied to the BPT first—maximizing the direct reduction of the state’s highest-rate tax before it reaches the BET.12

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Unitary and Combined Filers: Single Taxpayer Rule

The application of the R&D credit and the resulting overpayments are further complicated for businesses that operate as part of a unitary or combined group. Under RSA 77-A:5, XIII(c), a unitary business or an enterprise consisting of one or more taxpayers is considered a single taxpayer for the purpose of claiming the R&D credit.9

This “Single Taxpayer Rule” means that the $50,000 annual cap applies to the entire combined group, regardless of how many individual subsidiaries or entities are performing R&D within the state.10 Furthermore, when claiming the credit on a combined BPT return (such as Form NH-1120-WE), the group must follow specific administrative rules (Rev 306.06) regarding the allocation of the credit among its members.23

For combined filers, an overpayment often arises when one entity within the group has made large estimated payments, but the group’s total liability is reduced by an R&D credit generated by a different entity within the same unitary group. In these cases, the “Amount Overpaid” on the BT-Summary reflects the group’s collective cash position relative to its collective net liability after the R&D credit is applied.26

Analysis of Revenue Trends and Economic Impact

The Research and Development tax credit represents a significant “tax expenditure” for the state. According to the New Hampshire Department of Revenue Administration’s FY 2024 Tax Expenditure and Potential Liability Report, the R&D credit is one of several key programs intended to influence business behavior—in this case, encouraging investment in manufacturing technology and high-wage jobs.5

Demand for the Credit

The expansion of the credit from its initial $1 million aggregate cap in 2007 to the current $7 million cap in 2017 reflects the state’s commitment to this incentive.13 Despite this increase, the program remains oversubscribed. Data suggests that requested credits routinely approach or exceed the $7 million pool, necessitating proration for the vast majority of applicants.10

This high demand underscores the importance of the overpayment mechanism. For mid-sized manufacturers, the $50,000 credit can represent a substantial portion of their New Hampshire tax liability. When these businesses make quarterly estimates based on their gross receipts (for BET) or projected profits (for BPT), the eventual R&D award creates a “cash windfall” by generating a refund of those estimates.10

Statistical Relationship Between Rates and Revenue

Since 2015, New Hampshire business tax revenues have increased by 118%, despite the iterative reduction of tax rates.6 This indicates a robust and growing tax base. However, the New Hampshire Fiscal Policy Institute notes that while revenues have risen, they would have been even higher (by an estimated $795 million to $1.17 billion) if the 2015 rates had been maintained.6 For the individual taxpayer, these rate reductions mean that the $50,000 R&D credit “goes further” than it used to, as the total tax debt it is offsetting has decreased.6

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Practical Comprehensive Example: “Northern Electronics, LLC”

To illustrate the interplay of all these factors, consider a hypothetical case study of “Northern Electronics, LLC,” a precision manufacturer located in Manchester, New Hampshire.

Phase 1: Expenditure and Credit Calculation

For the 2023 tax year, Northern Electronics identifies $1,200,000 in qualified manufacturing R&D wages paid to New Hampshire-based employees. These wages are reported in their BET enterprise value tax base. Using the federal fixed-base percentage and their average gross receipts, they calculate a base amount of $400,000.

• Qualified Wages: $1,200,000
• Base Amount: $400,000
• Excess Wages: $800,000
• Calculation: $800,000 x 10% = $80,000
• Statutory Limit: The credit is capped at $50,000.

Northern Electronics files Form DP-165 by June 30, 2023, attaching a pro-forma Federal Form 6765.

Phase 2: Proration and Final Award

The DRA reviews all applications. In 2023, total qualified requests from all NH taxpayers totaled $8,750,000. Because this exceeds the $7,000,000 cap, the proration factor is 0.80 ($7M / $8.75M).

• Awarded Credit: $50,000 x 0.80 = $40,000.

On September 30, 2023, Northern Electronics receives an award letter for $40,000.

Phase 3: Tax Liability and Cash Payments

Throughout the year, Northern Electronics made four quarterly estimated payments of $15,000 each, totaling $60,000 in cash payments. Upon completing their annual tax forms:

• BPT Liability (before credits): $25,000
• BET Liability (before credits): $20,000
• Total Tax Liability: $45,000

Phase 4: Application on Form DP-160

Northern Electronics follows the hierarchy:

1. Offset BPT: The first $25,000 of the credit is used to reduce the BPT liability to zero.
2. Offset BET: The remaining $15,000 of the credit ($40k – $25k) is applied against the BET.
3. Resulting Liabilities: BPT = $0; BET = $5,000.
4. Net Tax Liability: $5,000.

Phase 5: Final Reconciliation on BT-Summary

The final step determines the overpayment:

• Line 1 (Net Tax): $5,000
• Line 2 (Total Payments): $60,000
• Line 6 (Amount Overpaid): $55,000

In this example, the Overpayment after Applying Credits is $55,000. Northern Electronics can now choose to receive a refund of $55,000 or apply it toward their 2024 taxes. Note that without the $40,000 R&D credit, their overpayment would have been only $15,000. The credit effectively “freed up” $40,000 in cash for the business.26

Strategic Implications of Nonrefundable Credits and Cash Flows

The Northern Electronics example highlights a critical strategic reality: the “nonrefundable” R&D credit provides a tangible cash benefit only to the extent that a taxpayer has either made estimated payments or has a liability to offset.

Cash Flow for Profitable vs. Non-Profitable Entities

For a profitable company that makes quarterly estimates, the R&D credit acts as a reimbursement for taxes already paid.10 However, for a startup in a loss position that has made no estimated payments, the credit does not result in an overpayment. Instead, it becomes a carryforward—an asset on the books that will reduce future taxes once the company becomes profitable.27 This distinction is critical for business valuation and capital planning.

The Opportunity Cost of Estimates

Since the final R&D award is unknown until September 30, businesses face a choice:

1. Overpay Estimates: Pay the full tax due without accounting for the R&D credit to avoid any risk of underpayment penalties (which can reach 10% interest for failure to pay).28
2. Adjust Estimates: Reduce estimated payments in anticipation of an R&D award. This preserves cash throughout the year but risks penalties if the credit is smaller than expected due to proration or if the application is denied.28

Most tax advisors recommend the former, as the current interest rate for overpaid taxes is 7%, providing some return on the “excess” cash held by the state, whereas the penalty for underpayment is a significantly higher 10%.31

Statutory Constraints: ERZTC and Other Limitations

A critical area of local state revenue guidance involves the interaction between the R&D credit and the Economic Revitalization Zone Tax Credit (ERZTC) under RSA 162-N:7. The law explicitly states that wages for which a credit is taken under the R&D program shall not also be eligible for the ERZTC.9

Decision Matrix: R&D vs. ERZTC

Businesses must conduct a comparative analysis to determine which credit yields a better “Overpayment after Applying Credits” scenario. The ERZTC is also nonrefundable and must be applied first against the BPT, but it has different eligibility criteria and a maximum cap of $40,000 per period.22 Because the R&D credit specifically targets “manufacturing” wages and allows a base amount as low as zero, it is often more lucrative for high-tech manufacturing firms, whereas the ERZTC may be better suited for businesses in designated zones with high job creation but fewer R&D-specific activities.10

Documentation and Audit Defense

The New Hampshire Department of Revenue Administration maintains a rigorous audit stance regarding the “manufacturing nexus” of R&D wages.10 To ensure that an overpayment is not clawed back in a future audit, businesses must maintain detailed documentation, including:

• Project Records: Lab notes, photographs of prototypes, and testing protocols.12
• Wage Allocations: Payroll records that specifically isolate the time spent by employees on qualifying activities versus administrative or non-manufacturing tasks.10
• Federal Alignment: Ensuring that the wages reported to New Hampshire perfectly align with those reported on lines 5 or 24 of Federal Form 6765.13

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Future Outlook: Legislative Changes and Economic Policy

The utility of the R&D credit and the resulting overpayments are sensitive to legislative shifts. A primary concern for New Hampshire businesses is the ongoing reduction of the BET and BPT rates.

The Impact of BET Rate Reductions (HB 15)

HB 15, which proposes reducing the BET rate from 0.55% to 0.50% starting in 2024, has complex implications.7 While a lower rate reduces the absolute tax burden, it also reduces the “absorption capacity” of the nonrefundable R&D credit. As the BET rate declines, a business with a static amount of R&D wages will find that more of its credit must be carried forward to future years because there is less liability to offset in the current year.8

The DRA’s fiscal analysis of HB 15 notes that reducing the BET rate will also reduce the BET credit available to offset the BPT, which could lead to an increase in BPT revenue if the taxpayer does not have other credits (like R&D) to satisfy that liability.8 For the taxpayer, this means the R&D credit becomes even more critical as a tool to maintain a low net liability and generate overpayments.

The Repeal of the Interest and Dividends (I&D) Tax

New Hampshire is also in the process of repealing its Interest and Dividends tax.2 While the R&D credit is generally not applied against the I&D tax (it is specifically for BPT and BET), the overall simplification of the state’s tax code and the removal of the I&D tax from the BT-Summary in 2024-2025 will streamline the reconciliation process for business owners who are also subject to personal income taxes on business distributions.2

Conclusion: Strategic Value of the R&D Credit Overpayment

The New Hampshire Research and Development tax credit remains a vital component of the state’s “pro-business” environment. While the credit is strictly nonrefundable, its integration into the dual-tax system of the BPT and BET creates a sophisticated mechanism for generating cash overpayments. By reducing the net tax liability to zero or near-zero, the credit allows businesses to recover cash previously paid as estimated taxes, providing immediate liquidity for reinvestment into manufacturing innovation.

To maximize this benefit, taxpayers must strictly adhere to the June 30 application deadline, navigate the hierarchical offset rules of Form DP-160, and correctly reconcile their accounts on the BT-Summary. As the state continues to adjust its business tax rates and aggregate caps, the R&D credit will continue to serve as a primary incentive for the manufacturing sector, transforming scientific experimentation into financial opportunity. For professional practitioners and business leaders, the “Overpayment after Applying Credits” is not merely a line item on a tax return; it is a measure of the effective utilization of one of the state’s most powerful economic incentives.

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