Structural Analysis of Qualified Services within the New Hampshire Research and Development Tax Credit Framework

Qualified Services represent the specific labor-based activities—direct conduct, first-line supervision, or immediate support of manufacturing research—that generate eligible wage expenditures for the New Hampshire tax credit. These services must be performed physically within state borders and directly facilitate the development of new or improved manufacturing processes or business components as defined by statute. 1

The New Hampshire Research and Development (R&D) Tax Credit, codified primarily under RSA 77-A:5, XIII, serves as a cornerstone of the state’s economic policy to foster a robust industrial and technological base. Unlike the federal research credit governed by Internal Revenue Code (IRC) Section 41, which provides a broader umbrella for various research-related costs, the New Hampshire credit is characterized by a disciplined focus on human capital specifically engaged in manufacturing innovation. This emphasis reflects a legislative intent to incentivize the retention and growth of high-value technical jobs within the state. To navigate this program effectively, business organizations must possess a granular understanding of what constitutes a “qualified service,” as this definition dictates the eligibility of the primary cost driver allowed under the program: wages. The following analysis explores the statutory foundations, administrative guidance, and practical applications of these services within the unique regulatory environment overseen by the New Hampshire Department of Revenue Administration (DRA). 1

Statutory Foundations and the Legislative Definition of Qualified Expenditures

The legal authority for the New Hampshire R&D tax credit is established through the Business Profits Tax (BPT) statutes. Specifically, RSA 77-A:5, XIII(a) provides for a credit against the tax due for “qualified manufacturing research and development expenditures made or incurred during the fiscal year.” The law is remarkably specific regarding the scope of these expenditures, limiting them “solely to any wages paid or incurred to an employee of the business organization for services rendered by such employee within this state.” 3 This “wage-only” limitation is a critical distinction that practitioners must recognize, as it excludes many categories of expenses that are typically eligible for the federal research credit, such as supplies, contract research, and computer rental costs. 1

The statute further refines the definition of these expenditures by establishing a three-part test for the services rendered. First, the services must be undertaken for the purpose of discovering information which constitutes qualified research and development of a new or improved manufacturing process or business component of the business organization. Second, the wages must qualify and be reported as a credit under Section 41 of the IRC. Third, the wages must be reported in the enterprise value tax base under the Business Enterprise Tax (BET) as defined in RSA 77-E. 1 By tethering the state credit to federal standards while adding a “manufacturing” filter and a geographic requirement, New Hampshire creates a specialized incentive that rewards the intersection of technical innovation and industrial production. 1

The Intersection of State Law and Federal Section 41

Because RSA 77-A:5, XIII(b)(1)(C) explicitly references IRC Section 41, the federal definitions of “qualified services” are imported into the New Hampshire tax code. Under federal Treasury Regulations and IRC Section 41(b)(2)(B), qualified services are divided into three primary categories:

1. Engaging in qualified research, which represents the actual conduct of the research.
2. Directly supervising qualified research, which involves the immediate management of those conducting the research.
3. Directly supporting qualified research, which includes activities that facilitate the research process. 7

In the context of New Hampshire law, however, these services must also satisfy the “manufacturing” nexus. A software developer creating a generic mobile application may be performing qualified services for federal purposes, but those services would likely fail to qualify for the New Hampshire credit unless the software is a “business component” of a manufacturing process or product. 1 This dual-requirement—meeting federal research standards while maintaining a manufacturing focus—forms the core challenge for taxpayers in documenting their “qualified services.” 1

Regulatory Guidance and Technical Information Releases

The New Hampshire Department of Revenue Administration (DRA) provides clarity on the application of the law through several channels, including Administrative Rules, Technical Information Releases (TIRs), and published Frequently Asked Questions (FAQs). These resources represent the official position of the Department and serve as the primary guidance for taxpayers and practitioners. 3

Administrative Rule Rev 2406.05

N.H. Admin. Code § Rev 2406.05 provides the procedural framework for claiming the credit. This rule mandates that a business enterprise must complete and file Form DP-165, “Research & Development Tax Credit Application,” by June 30 following the taxable period. 10 Crucially, the rule reinforces the statutory requirement that any wages included in the R&D credit calculation must also be included in the “compensation element” of the enterprise value tax base for BET purposes. 10 This ensures consistency across the different tax types administered by the state and prevents taxpayers from claiming a credit on wages that were not properly reported as part of their New Hampshire payroll. 1

Technical Information Release TIR 2007-007

The foundational guidance for the program was issued in TIR 2007-007 following the enactment of the credit. This release provides the essential interpretation of “qualified manufacturing research and development expenditures.” It clarifies that these are “wage amounts attributable to New Hampshire that make up lines 5, 24, or 49 of the business organization’s Federal Form 6765.” 3 By pointing directly to specific lines on the federal form, the DRA simplified the initial screening process for applicants. Line 5 of Form 6765 generally corresponds to wages for qualified services under the “Regular Credit” method, while line 24 corresponds to the “Alternative Simplified Credit” (ASC) method. 2 This guidance makes it clear that while federal law allows other expenses on Form 6765, New Hampshire only recognizes the wage components. 1

Evolution of the Program via TIR 2013-001 and 2015-005

Subsequent TIRs reflect the legislative expansion of the program’s funding. TIR 2013-001 announced the increase of the annual aggregate credit cap from $1 million to $2 million. 2 More recently, TIR 2015-005 detailed the compromise budget agreement that raised the total aggregate amount to $7 million, effective July 1, 2017. 2 These increases demonstrate the high demand for the credit and its perceived value as an economic development tool. However, even with a $7 million cap, the program remains “oversubscribed,” meaning that the total of all qualified services reported by all New Hampshire businesses frequently exceeds the available funding, necessitating a pro-rata reduction in individual awards. 1

Detailed Analysis of Qualified Services Categories

To accurately identify qualified services, a business must look beyond job titles and examine the specific activities performed by each employee. The DRA focuses on the nature of the work and its direct connection to the research process. 7

Category I: Direct Performance of Research

The direct performance of research is often the largest component of a claim. In a manufacturing environment, this typically involves the technical staff—engineers, material scientists, chemists, and software developers—who are actively working to solve technological uncertainties. 4 Under federal and state guidance, an employee is engaging in the direct performance of research when they are:

• Designing and conducting experiments to test new manufacturing methods.
• Developing and testing physical prototypes of new products.
• Formulating and testing new chemical compositions for industrial use.
• Writing and debugging code for proprietary manufacturing execution systems. 1

For these services to qualify, they must pass the federal “Four-Part Test.” The activity must be for a permitted purpose (creating a new or improved business component), must be technological in nature (relying on hard sciences), must involve the elimination of technical uncertainty, and must involve a process of experimentation. 4

Category II: Direct Supervision

Direct supervision refers to the immediate, first-line management of the research process. The DRA and federal guidelines distinguish between “direct” supervision and “general” management. 7 A qualified supervisor is typically a person who:

• Directly manages the day-to-day progress of a research project.
• Directly reviews the technical work of engineers and scientists.
• Participates in technical meetings to resolve uncertainties.
• Provides “hands-on” technical guidance during the prototyping or testing phases. 7

Importantly, higher-level executives who only receive reports or manage the “financials” of a research department do not qualify. For example, a Vice President of Operations who oversees five different manufacturing plants likely does not provide the “direct” supervision required by the statute, even if one of those plants is conducting significant R&D. Conversely, a Chief Technology Officer (CTO) in a small startup who is personally leading the engineering team on a daily basis may very well qualify. 7

Category III: Direct Support

Direct support includes tasks that are essential to the research activity but do not involve the actual “science” or “engineering.” In a manufacturing context, this category is often overlooked but can be a valuable part of the claim. 11 Examples of qualifying support services include:

• A machinist who spends their day fabricating a specific part that is used exclusively in a research prototype.
• A laboratory technician who cleans and calibrates specialized testing equipment.
• A data clerk who compiles the raw results from laboratory trials for the engineers to analyze.
• A production worker who assists in a “test run” of a new manufacturing process to monitor for defects. 7

Services that do not qualify as direct support include general administrative functions, such as human resources (recruiting for the R&D team), accounting (tracking R&D budgets), and general janitorial services. The support must be “direct” to the performance of the qualified services by others. 7

The Manufacturing Nexus: A New Hampshire-Specific Filter

The most restrictive element of the New Hampshire R&D credit is the requirement that the research must be related to manufacturing. While the federal credit applies to any “business component” (which can include services, software, or products), New Hampshire RSA 77-A:5, XIII(b)(1)(B) limits the credit to the development of a “new or improved manufacturing process or business component.” 1

Defining Manufacturing for Tax Purposes

Although the R&D statute does not provide a comprehensive list of manufacturing industries, other parts of the New Hampshire tax code and administrative rules provide context. For instance, Rev 301.27 defines “manufacturing inventories” as part of the real and tangible personal property used in business activities. 16 Furthermore, the state’s focus on “qualified regenerative manufacturing” (RSA 77-A:5-c) indicates a preference for advanced, high-technology manufacturing sectors. 17 In practice, the DRA focuses on industries that involve the physical transformation of materials into new products, such as:

• Electronics and semiconductor fabrication.
• Aerospace and defense component production.
• Medical device manufacturing.
• Precision machinery and tool-and-die operations.
• Chemical and pharmaceutical production. 1

Software Development as a Manufacturing Service

One of the more complex areas of guidance involves software. For software development wages to count as qualified services in New Hampshire, the software must generally be intended for use in a manufacturing process or be part of a manufactured product. Software developed for internal “general and administrative” purposes—such as a payroll system or a customer relationship management (CRM) tool—would fail the “manufacturing” test even if it met federal R&D standards. However, software that controls a robotic assembly arm or software that is embedded in a medical diagnostic device would likely qualify. 1

Comparative Analysis: New Hampshire vs. Federal Expenditure Rules

To understand the practical impact of “qualified services” on a tax return, it is necessary to compare the state and federal eligible expenses. This comparison highlights why New Hampshire’s credit is often viewed as a “labor-only” incentive. 1

Note: The exclusion of supplies and contract research means that a company with a high percentage of “out-of-house” R&D will see a much smaller benefit from the New Hampshire credit than from the federal credit. 1

The rationale for this divergence is often debated in legislative circles. By focusing solely on internal wages, New Hampshire ensures that the tax benefit is directly tied to the employment of residents within the state. This prevents the state from subsidizing research that is outsourced to contractors in other states or countries. 1

Statistical Overview and Program Performance

The Department of Revenue Administration produces an annual “Tax Expenditure and Potential Liability Report” that provides data on the utilization of the R&D credit. This report is a vital resource for understanding the scale of the program and the competitive nature of the award process. 13

Five-Year Trend Analysis (FY 2020 – FY 2024)

The following data represents the total amount of credit claimed on returns filed within the respective fiscal years. Because of the five-year carryforward provision, the amount of “credit used” in a year may be less than the total amount “awarded” in that year. 13

Source: NH Department of Revenue Administration FY 2024 Tax Expenditure Report. 13

The relative stability in the “Average Benefit” suggests that while more taxpayers are participating in the program, the individual $50,000 cap and the $7 million aggregate cap are effectively managing the state’s fiscal exposure. In most years, the program is fully subscribed, meaning that the total qualifying wages reported by New Hampshire businesses would have justified a much higher total expenditure if the cap were not in place. 1

The Application and Award Process: Mechanics of Form DP-165

Unlike many state tax credits that are “self-certified” on a tax return, the New Hampshire R&D credit requires a formal application and an affirmative award letter from the DRA. This process is governed by strict deadlines. 2

Timeline for Compliance

1. Fiscal Year Activity: The business conducts R&D and pays qualifying wages throughout its fiscal year.
2. Federal Filing Preparation: The business (or its tax provider) prepares Federal Form 6765. This is required even if the federal return is on extension. 2
3. June 30 Deadline: The business must file Form DP-165, “Research & Development Tax Credit Application,” with the DRA. This application can now be submitted through the “Granite Tax Connect” (GTC) portal. 8
4. July 31 Acknowledgment: The DRA sends a letter acknowledging receipt of the application. 2
5. September 30 Award: The Commissioner of the DRA determines the final award amount for each taxpayer and sends out formal award letters. 1

The Calculation of the Award

The amount of the credit is the lesser of three values:

1. The Percentage Calculation: 10% of the excess of qualified manufacturing R&D wages over the “base amount.”
2. The Individual Cap: $50,000.
3. The Pro-Rata Share: The taxpayer’s proportional share of the $7,000,000 statewide cap. 1

The “base amount” is a particularly nuanced part of the calculation. While based on federal IRC Section 41 logic (using a fixed-base percentage and average gross receipts), New Hampshire allows this base to be as low as zero, as it removes the federal requirement that the base must be at least 50% of the current year’s expenses. This makes the credit more accessible for startups or businesses with rapidly increasing R&D payrolls. 1

Practical Case Study: Manufacturing Innovation in Merrimack

To illustrate the application of “qualified services” and the resulting tax benefit, consider a hypothetical medium-sized company, Granite State Aerospace (GSA), located in Merrimack, New Hampshire.

Background and Research Project

GSA manufactures high-tolerance titanium components for jet engines. To remain competitive, GSA launched a project to develop a new “additive manufacturing” (3D printing) process for these components. This process aims to reduce material waste by 40% and increase the structural integrity of the parts.

Personnel and Wage Allocation

GSA’s R&D team consists of several individuals whose roles must be analyzed for “qualified services”:

• Senior Materials Scientist ($150,000 salary): Spent 100% of her time in the lab conducting experiments on titanium powder fusion. Classification: Direct Performance. Qualifying Wages: $150,000.
• Robotics Engineer ($110,000 salary): Spent 90% of his time writing the software that controls the 3D printer and testing different print speeds. Classification: Direct Performance. Qualifying Wages: $99,000.
• R&D Department Manager ($130,000 salary): Spent 40% of her time providing direct technical oversight to the scientist and engineer, reviewing their test results daily. The other 60% was spent on general plant management. Classification: Direct Supervision. Qualifying Wages: $52,000.
• Precision Machinist ($70,000 salary): Spent 50% of her time cleaning the 3D printer’s laser optics and fabricating specialized build plates for each trial run. Classification: Direct Support. Qualifying Wages: $35,000.
• Procurement Officer ($85,000 salary): Spent 10% of his time sourcing the specific titanium powders used in the project. Classification: Non-Qualifying (General Administrative). Qualifying Wages: $0.

Total GSA Qualified NH Wages: $336,000. 1

Credit Calculation for GSA

1. Current Year Qualified Wages: $336,000.
2. Base Amount: Assume GSA’s historical base is $150,000.
3. Excess Wages: $336,000 – $150,000 = $186,000.
4. Initial Credit Estimate: 10% of $186,000 = $18,600.
5. Application of Caps: Since $18,600 is less than $50,000, GSA applies for $18,600.
6. Proration Factor: In a year where the state is oversubscribed by 10%, GSA’s final award would be approximately $16,740 ($18,600 * 0.90). 1

GSA would then take this $16,740 award and apply it first against its Business Profits Tax (BPT). If GSA’s BPT liability was only $10,000, the remaining $6,740 would be used to offset its Business Enterprise Tax (BET). 1

Documentation and Audit Defense: Best Practices

The New Hampshire DRA maintains the right to audit R&D tax credit claims to ensure that the services reported truly were “manufacturing” in nature and were performed “within the state.” 1 Given the “wage-only” nature of the credit, audits focus heavily on two areas: nexus and allocation. 1

Proving the Manufacturing Nexus

To survive an audit, a company must demonstrate that its research was not just “innovation” in the general sense, but specifically related to manufacturing. Recommended documentation includes:

• Project Narrative: A clear description of the technical uncertainty being addressed and how the solution involves a manufacturing process or product. 11
• Engineering Drawings and Prototypes: Physical evidence of the “business component” being developed. 15
• Test Logs and Results: Contemporaneous records of the “Process of Experimentation.” 4

Substantiating Wage Allocations

Because wages are often split between qualifying and non-qualifying activities (as seen in the GSA case study), the methodology for these splits is highly scrutinized. 7 Best practices include:

• Contemporaneous Time Tracking: Using a system that allows employees to code their hours to specific R&D projects. 7
• Employee Interviews: The DRA or IRS may interview technical staff to confirm that their daily activities match the “qualified services” description. 7
• Payroll Registers and W-2s: Verification that the employees were indeed based in New Hampshire and that the reported wages were subject to NH taxes. 11

Future Outlook: Legislative Proposals and Economic Trends

The future of the New Hampshire R&D tax credit is currently a topic of significant legislative debate. The consistent oversubscription of the program has led to calls for further funding increases. 1

The 2025 Legislative Session: SB 276

Senate Bill 276 (and its companion HB 1102) represents the most recent attempt to expand the credit. The proposed legislation sought to:

• Increase the aggregate statewide cap from $7,000,000 to $10,000,000.
• Increase the individual taxpayer cap from $50,000 to $100,000. 19

The fiscal note for SB 276 estimated that these changes would decrease state business tax revenue by approximately $3 million in the first year of full implementation. 19 While the bill was “Laid on Table” in early 2025, the bipartisan support from sponsors across the state indicates that the pressure to increase the credit remains high. 20 Manufacturers argue that the $50,000 cap, which has remained unchanged for years, has been eroded by inflation and no longer provides a sufficient incentive for larger R&D projects. 19

Emergence of Specialized Manufacturing Credits

In addition to the general R&D credit, New Hampshire has shown a willingness to create highly targeted incentives for specific industries. RSA 77-A:5-c and RSA 77-E:1, III provide exemptions and credits for “Qualified Regenerative Manufacturing Companies.” 17 This legislation, intended to support the burgeoning bio-fabrication industry in places like Manchester’s Millyard, illustrates the state’s strategy of using tax policy to secure “first-mover” advantage in emerging high-tech sectors. 18 For these companies, the definition of “qualified services” is even more specialized, focusing on the creation of human tissue and organs for medical purposes. 18

Interaction with Other State Credits and Incentives

Taxpayers must be careful to avoid “double-dipping” when claiming the R&D credit alongside other New Hampshire business incentives. The DRA and state statutes include specific exclusions to manage this. 1

The ERZTC Exclusion

The Economic Revitalization Zone Tax Credit (ERZTC), codified in RSA 162-N, provides a credit for job creation and investment in designated zones. 1 However, 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 a credit under RSA 162-N.” 1 This means that if a manufacturer in a Manchester ERZ hires a new R&D engineer, they must choose which credit to apply to those specific wages. Generally, the ERZTC is a one-time credit for new jobs, while the R&D credit can be claimed annually as long as the research activities continue, making the R&D credit often more valuable in the long term. 1

The BET Credit Cascade

A unique feature of the New Hampshire tax system is the relationship between the Business Enterprise Tax (BET) and the Business Profits Tax (BPT). In many cases, the BET paid by a company is allowed as a credit against its BPT liability. 25 The R&D credit, however, is a “direct” credit. As specified in TIR 2015-005 and Rev 2406.05, the R&D credit is applied first against the BPT. If the R&D credit wipes out the BPT liability, any unused portion can then be applied against the BET. 1 This sequence is important for tax planning, as it affects the overall effective tax rate of the business organization. 25

Conclusion: Navigating the Complexity of Qualified Services

The New Hampshire Research and Development Tax Credit is a powerful but precisely calibrated instrument. Its success is rooted in its focus on “qualified services”—those essential human activities that transform theoretical science into physical manufacturing reality. By adhering to federal standards for research while insisting on a local manufacturing nexus, the state has created a program that is both rigorous and rewarding. 1

For the business community, the challenges of the program—strict deadlines, the “wage-only” limitation, and the potential for proration—are offset by the long-term value of the incentive. A company that embeds the principles of “qualified services” into its internal documentation and project tracking will not only secure a valuable tax benefit but will also build a disciplined culture of innovation. As the state considers future expansions of the program cap and individual limits, the R&D credit will likely remain a vital part of New Hampshire’s identity as a hub for precision manufacturing and technological excellence. 1

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