The Unitary Business Doctrine and the New Hampshire Research and Development Tax Credit: A Comprehensive Legal and Regulatory Analysis

A unitary business in New Hampshire is a group of related business organizations that operate as a single integrated enterprise, characterized by common ownership and significant operational interdependence. Under state law, these groups are treated as a single taxpayer for tax credit purposes, meaning the entire group shares a consolidated cap for the New Hampshire Research and Development tax credit.1

The complexities of modern corporate structures often lead to business activities being spread across multiple legal entities, sometimes spanning several states or even international borders. For the New Hampshire Department of Revenue Administration (DRA), the challenge lies in determining when these separate legal shells should be treated as a single economic unit for tax purposes. This determination, known as the unitary business doctrine, has a profound impact on how the New Hampshire Research and Development (R&D) tax credit is calculated, applied, and capped. To navigate this landscape, one must look beyond the surface of corporate charts and into the functional realities of how a business operates, how it is managed, and how its various parts contribute to a collective whole.1

The Statutory and Regulatory Definition of a Unitary Business

The foundation of the unitary business concept in the Granite State is found in New Hampshire Revised Statutes Annotated (RSA) 77-A:1, XIV. The statute defines a unitary business as one or more related business organizations engaged in business activity both within and without the state, among which there exists a unity of ownership, operation, and use, or an interdependence in their functions.1 This definition is not merely a legal technicality; it is the mechanism by which the state ensures that tax liabilities and credits accurately reflect the economic reality of an enterprise’s presence in New Hampshire.

The Three Unities: Ownership, Operation, and Use

The Department of Revenue Administration further clarifies the statutory language through the New Hampshire Code of Administrative Rules, specifically the Rev 300 series. The “three unities” test is the traditional benchmark for identifying a unitary business.2

Unity of ownership is generally established when a single person or entity, or a related group of persons or entities, owns more than 50 percent of the voting stock of each business organization in the group.2 This threshold provides the necessary control to direct the activities of the various entities toward a common goal. Without this majority control, the state typically views entities as independent actors, even if they have close commercial ties.

Unity of operation and unity of use are more qualitative in nature. They refer to the integration of back-office functions and the centralized management of the enterprise. Evidence of these unities includes the use of a centralized purchasing system, shared legal and accounting services, common advertising and marketing strategies, and the intercompany transfer of personnel.1 For instance, if a parent company in Boston provides the human resources, payroll, and legal support for its manufacturing subsidiary in Manchester, these entities are likely operating with a unity of operation.4

Functional Interdependence and the Integral Part Test

The second branch of the unitary definition focuses on “interdependence in functions.” Under Rev 301.20, this is described as a relationship where the New Hampshire entity is an integral part of a larger system.4 In this systemic view, the business conducted within the state is dependent upon or contributes to the operation of the business without the state.4 This is often seen in vertically integrated companies where one subsidiary produces raw materials that are used by another subsidiary to manufacture a finished product, which is then sold by a third subsidiary.

The Mechanics of the New Hampshire R&D Tax Credit

To understand how the unitary business doctrine applies to the R&D credit, one must first master the specific requirements of the credit itself. Established under RSA 77-A:5, XIII, the New Hampshire Research and Development Tax Credit is a targeted incentive designed to bolster manufacturing innovation within the state.5

Qualified Manufacturing Research and Development Expenditures

Unlike the federal R&D credit, which can be applied to a wide array of activities and expenses, the New Hampshire version is strictly limited to “qualified manufacturing research and development expenditures”.5 The state defines these expenditures solely as wages paid to employees for services rendered within New Hampshire.7

To qualify, these wages must meet a high evidentiary bar:

1. Manufacturing Focus: The research must be tied to manufacturing activities.5
2. Federal Eligibility: The wages must qualify as research expenses under Section 41 of the Internal Revenue Code (IRC).5
3. Reporting Consistency: The wages must be reported on the business organization’s Federal Form 6765, specifically lines 5 or 24.7
4. NH Nexus: The services must have been performed in New Hampshire.3

This “wages-only” approach means that a company cannot claim credits for supplies, computer leasing costs, or contract research—expenses that are commonly included in federal R&D credit calculations.5 This makes the New Hampshire credit particularly valuable for labor-intensive manufacturing sectors where high-skilled engineering and design work are performed in-state.

Calculation and the Proration Mechanism

The credit is calculated as 10 percent of the excess of qualified manufacturing R&D expenses over a base amount.3 New Hampshire allows the base amount to be as low as zero, which is a significant departure from federal rules that typically mandate a minimum base amount.5

However, the credit is subject to a strict annual statewide cap. Currently, the aggregate of all tax credits issued to all taxpayers cannot exceed $7,000,000 for any fiscal year.5 Because the demand for this credit often exceeds the available pool, the DRA employs a proration mechanism. If the total amount of credits applied for by all NH businesses exceeds $7 million, every individual award is reduced proportionately.6

The Intersection of Unitary Business and the R&D Credit

The most critical intersection of these two concepts is found in RSA 77-A:5, XIII(c). The statute mandates that a unitary business or an enterprise consisting of more than one taxpayer shall be considered a single taxpayer for purposes of claiming the R&D credit.3

The “Single Taxpayer” Rule for Unitary Groups

This “single taxpayer” provision has significant implications for how the $50,000 per-taxpayer cap is applied. In a separate-reporting state, a large conglomerate might have ten different subsidiaries in New Hampshire, each performing R&D. If they were treated separately, they might collectively claim $500,000 in credits. In New Hampshire, however, if those ten entities are found to be unitary, they are treated as one unit. Consequently, the entire group is limited to a single $50,000 cap.6

The rationale behind this rule is to prevent corporate groups from splintering their operations into numerous legal entities purely to multiply their tax benefits. By collapsing the unitary group into a single entity for credit purposes, the state ensures that the $7 million aggregate pool is distributed more equitably across different industries and independent business owners, rather than being dominated by a few large corporate families with complex structures.

Impact on Application and Proration

When a unitary group applies for the credit using Form DP-165, they must aggregate the qualified wages of all group members.6 This combined total is then used to calculate the group’s tentative credit. If the calculated credit exceeds $50,000, the DRA caps it at $50,000 before applying the statewide proration factor.5

For example, if a unitary group has $2,000,000 in excess qualified wages, 10 percent of that amount is $200,000. However, the group’s requested credit on Form DP-165 will be limited to $50,000.13 If the statewide proration for that year is 80%, the group’s final awarded credit will be $40,000.5

Revenue Office Guidance on Credit Application and Distribution

The Department of Revenue Administration provides detailed guidance on how credits should be applied within a combined group through its administrative rules. These rules are essential for ensuring that the correct entities receive the benefit of the credit and that the group’s total liability is accurately calculated.

Administrative Rule Rev 306.06: The Distribution Logic

Rev 306.06 is the primary rule governing the application of credits to business organizations included in a combined group.14 It provides a mathematical framework for determining the portion of the group’s total tax liability that is attributable to each individual member. This is necessary because the R&D credit applies against the specific liability of the members who have a taxable presence in the state.

For tax periods ending on or after December 31, 2022, the DRA has shifted to a single-sales factor apportionment model.2 Under Rev 306.06(c), the distribution of the credit within a unitary group follows these steps:

1. Combined Nexus Group Denominator: The group must determine a combined sales factor denominator by adding the sales factor numerators of all individual members of the combined group that are subject to tax under RSA 77-A.14
2. Individual Apportionment Percentage: Each member’s individual percentage is determined by dividing its New Hampshire sales numerator by the combined denominator identified in the first step.14
3. Member Liability: This individual percentage is applied to the total Business Profits Tax liability of the combined group.14
4. Credit Offset: The R&D credit is then applied against these individual member liabilities.14

The Order of Credit Absorption: BPT and BET

One of the unique features of the New Hampshire R&D credit is its “cascading” application. Under state guidance and Form DP-160 instructions, the credit follows a specific order of operations:

• BPT First: The credit must first be used to offset the taxpayer’s Business Profits Tax (BPT) liability.7
• BET Second: Any remaining unused portion of the credit may then be applied against the Business Enterprise Tax (BET) liability.6
• Carryforward: If there is still a remainder after offsetting both taxes, it can be carried forward for up to five years.5

This sequencing is significant because the BET is generally a credit against the BPT (the “BET Credit”).18 If a company uses the R&D credit to wipe out its BPT liability, it may not be able to fully utilize its BET credit in the current year, potentially leading to a higher effective tax rate if not managed carefully through tax planning.19

Procedural Requirements and Compliance Standards

Claiming the R&D tax credit is a two-step process in New Hampshire: first, the taxpayer must apply for the credit; second, they must claim the awarded amount on their tax returns.

Filing the DP-165: The Application Stage

The application for the R&D credit (Form DP-165) is separate from the annual tax return.7 The deadline is uncompromising: applications must be postmarked no later than June 30 following the taxable period in which the expenditures were made.7 Late applications are typically rejected, and the taxpayer loses their chance to participate in that year’s credit pool.5

For a unitary group, the “Taxpayer” on Form DP-165 is the principal New Hampshire business organization of the group.13 This entity files on behalf of the entire unitary group and must attach a copy of the group’s Federal Form 6765.7 If the group’s federal return is on extension, they must provide a “pro-forma” Form 6765 with the DP-165 to substantiate the wage amounts claimed.7

Claiming the Award: Form DP-160 and the Award Letter

Once the DRA processes all applications, they issue award letters by September 30.7 This award letter is the taxpayer’s authorization to take the credit on their BPT and BET returns. To claim the credit, the taxpayer must file Form DP-160, “Schedule of Credits,” and attach a copy of the award letter.18

Unitary groups filing a combined return (Form NH-1120-WE) must also include a separate schedule showing the Rev 306.06 calculation if they have more than one member subject to the BPT.18 This schedule demonstrates how the group’s single $50,000 (or prorated amount) credit is being distributed among its various New Hampshire members.

Example: The “Precision Tech” Unitary Group

To illustrate these concepts in practice, consider a hypothetical electronics manufacturing group named “Precision Tech,” which operates as a unitary business for the 2024 tax year. Precision Tech consists of three subsidiaries:

1. Precision-Mfg: A manufacturing facility in Manchester.
2. Precision-R&D: A specialized research laboratory in Nashua.
3. Precision-Sales: A regional sales office in Salem.

The group is found to be unitary because they share a parent company (Unity of Ownership), use a common management team and centralized HR system (Unity of Operation and Use), and the R&D lab designs the products that the Manchester facility manufactures (Interdependence).2

Step 1: Aggregating Wages and Applying for the Credit

Precision Tech identifies the following qualified NH R&D wages (from lines 5/24 of their pro-forma Federal Form 6765):

• Precision-Mfg: $400,000 in qualifying wages.
• Precision-R&D: $600,000 in qualifying wages.
• Precision-Sales: $0 in qualifying wages.

Under the single taxpayer rule, Precision Tech aggregates these wages for a total of $1,000,000.3 Assuming their base amount is $200,000, their excess wages are $800,000.

• Tentative Credit: 10% of $800,000 = $80,000.
• Application Cap: Precision Tech is capped at $50,000 on its Form DP-165.3

Precision Tech submits Form DP-165 by June 30.

Step 2: Proration and Award

In September, the DRA notifies Precision Tech that the statewide aggregate of credit requests was $14,000,000. Since the pool is $7,000,000, the proration factor is 50%.5

• Precision Tech Awarded Credit: $50,000 x 0.50 = $25,000.

Step 3: Distribution via Rev 306.06

Precision Tech files its combined BPT return (NH-1120-WE). The total group BPT liability is $100,000. They must distribute the $25,000 credit based on the sales-factor apportionment of its members.14

The group applies the $25,000 credit against the total liability. For record-keeping and Form DP-160 purposes, the credit is allocated proportionally. For instance, Precision-Sales, despite having no R&D wages, would utilize $15,000 (60% of $25k) of the credit because it carries 60% of the group’s New Hampshire tax burden.14

The Impact of Single-Sales Factor Apportionment

A significant shift occurred for tax periods ending on or after December 31, 2022, when New Hampshire transitioned from a three-factor apportionment formula (property, payroll, and a double-weighted sales factor) to a single-sales factor formula.2 This change has direct implications for how unitary groups manage their R&D credits.

Previously, the “Individual Apportionment Percentage” used to distribute credits was based on the average of the property, payroll, and sales factors of the individual member compared to the group’s combined totals.14 Because R&D-heavy members typically have higher payroll and property numerators, a larger portion of the group’s credit was naturally allocated to those entities.

Under the current single-sales factor regime, the distribution of credits is decoupled from where the R&D (the payroll and property) actually occurs. Instead, it is distributed solely based on where the sales occur.14 In the “Precision Tech” example above, this resulted in the Sales subsidiary utilizing the majority of the credit, even though the R&D subsidiary generated the qualifying expenditures. This shift underscores the importance of viewing the unitary group as a single economic organism rather than a collection of separate profit centers.

Statistical Context and Market Trends

The New Hampshire R&D tax credit is one of the most significant line items in the state’s tax expenditure budget. According to the Fiscal Year 2024 Tax Expenditure and Potential Liability Report, the credit is a major component of the state’s strategy to attract and retain high-tech manufacturers.19

Historically, the program has grown significantly:

• 2007-2012: The aggregate cap was $1,000,000.6
• 2013-2016: The aggregate cap was increased to $2,000,000.7
• 2017-Present: The aggregate cap was increased to $7,000,000.7

Despite these increases, the “proration problem” persists. As the state’s tech sector has expanded—particularly in areas like Nashua, Manchester, and the Seacoast—the number of companies performing R&D has outpaced the $7 million funding pool.5 This has led to the common situation where companies receive only a fraction of the $50,000 maximum they applied for.

The 2024 Tax Expenditure Report notes that credits like the R&D tax credit are “non-refundable,” meaning they can only reduce a tax liability to zero; they do not result in a check from the state.19 This makes the 5-year carryforward provision essential for startups or companies in a cyclical downturn who may not have enough BPT or BET liability to absorb their full award in a single year.5

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

A major legislative change is on the horizon that will significantly impact unitary businesses in New Hampshire. Senate Bill 276 (SB 276), introduced for the 2025 legislative session, aims to address the proration issue by significantly expanding the program.9

The key provisions of SB 276 include:

• Expansion of the Pool: Increasing the statewide aggregate cap from $7,000,000 to $10,000,000 for any fiscal year.9
• Doubling the Individual Cap: Increasing the maximum credit allowed per taxpayer (or unitary group) from $50,000 to $100,000.9
• Effective Date: The proposed changes would take effect on January 1, 2026, meaning they would likely apply to applications received by June 30, 2026.9

For a unitary group, this change represents a significant increase in the potential value of their NH-based R&D activities. A group that was previously capped at $50,000 could see its maximum award double, provided the statewide pool is not entirely consumed by the increased demand. This legislative move signals New Hampshire’s continued commitment to competing with other New England states for manufacturing and technology investments.

Strategic Considerations for Unitary Businesses

Navigating the intersection of unitary reporting and R&D credits requires proactive tax management. Business leaders and tax professionals should consider several strategic factors.

Entity Structuring and Nexus

Because the R&D credit is tied to the “single taxpayer” group, there is little tax benefit to creating multiple subsidiaries to perform R&D within New Hampshire. In fact, doing so can increase administrative costs without providing any relief from the $50,000 (soon to be $100,000) cap.6 However, ensuring that all entities are properly classified as unitary is crucial. If the DRA successfully challenges the unitary status of an R&D-heavy entity, that entity might be left with a large credit but no tax liability to offset, while a profitable sales entity in the same group is forced to pay full tax without the benefit of the credit.28

Coordination with Other Credits

New Hampshire has several other tax credit programs, such as the Economic Revitalization Zone (ERZ) Tax Credit and the Education Tax Credit.5 There are strict anti-double-counting rules in place. Specifically, wages used to calculate the R&D tax credit cannot also be used to claim the ERZ credit.3 Unitary groups must carefully analyze which credit provides the higher value for their specific NH payroll.

Record Retention and Audit Preparedness

Given the competition for the R&D credit, the DRA frequently audits DP-165 applications and subsequent credit claims.5 Unitary groups must maintain a robust audit trail, including:

• Detailed payroll records tying specific wages to specific NH employees and projects.5
• Project documentation that meets the federal IRC § 41 “four-part test,” specifically demonstrating how the activity is technological in nature and involves a process of experimentation.11
• The “Single Taxpayer” affiliation schedule used to prepare the combined return, showing the ownership links between all group members.21

Conclusion

The meaning of a unitary business in the context of the New Hampshire R&D tax credit is defined by the principle of economic integration. By treating a group of related entities as a single taxpayer, the state aligns its tax incentives with the way modern enterprises actually function—not as a collection of isolated legal boxes, but as a unified system of ownership, operation, and functional interdependence.

For the business organization, this means that the $50,000 annual cap is a hard ceiling for the entire corporate family, regardless of its internal complexity. Success in claiming this credit depends on a deep understanding of the DRA’s guidance, from the “wages-only” definition of qualified expenditures to the complex distribution formulas mandated by Rev 306.06. As the state prepares to expand the program in 2026, the R&D tax credit remains a cornerstone of New Hampshire’s value proposition for manufacturers, provided those businesses can master the nuances of the unitary business doctrine. Through careful planning, meticulous documentation, and a clear-eyed view of the legislative trajectory, unitary businesses can continue to use this credit to fuel their innovation and growth within the Granite State.

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