Supplies and Materials (for research)

Comprehensive Analysis of Supplies and Materials within the New Mexico Technology Jobs and Research and Development Tax Credit Framework

Supplies and materials in the context of New Mexico’s research tax credit refer to tangible items like test components and technical literature consumed during experimentation. These expenses are categorized as qualified expenditures, allowing technology firms to offset significant operational costs associated with in-state scientific discovery.

The conceptual definition of supplies and materials within the New Mexico tax code is intentionally broad yet strictly governed by the “process of experimentation” requirement. Unlike general business inputs, these materials must be integral to discovering information that is technological in nature and intended for the development of a new or improved business component. This analysis explores the statutory definitions, the regulatory guidance provided by the New Mexico Taxation and Revenue Department (TRD), and the practical application of these incentives for businesses operating within the state.

The Legislative Evolution and Strategic Purpose of the Act

The current landscape of New Mexico’s research incentives is the result of decades of legislative refinement aimed at transforming the state into a hub for technological innovation. The Technology Jobs and Research and Development Tax Credit Act, codified under NMSA 1978 § 7-9F-1, represents a primary pillar of this strategy. Originally enacted in 2000 as the “Technology Jobs Tax Credit Act,” the program was designed to provide a favorable tax climate for businesses engaging in research and development (R&D) and to promote higher wages and employment in STEM fields.

In 2015, the state legislature passed House Bill 230, which significantly expanded the scope and value of the credit. This amendment rebranded the act to its current name and increased the credit rates from 4% to 5% of qualified expenditures for both the basic and additional credit components. More importantly for taxpayers, the 2015 changes deepened the definition of “qualified expenditures” to better accommodate the high variable costs associated with modern laboratory and prototype work, specifically listing test materials and technical manuals as eligible costs.

The strategic intent behind including supplies and materials is to mitigate the financial risk of “failed” experiments. In industries such as aerospace or biotechnology, the materials consumed during the testing phase—often referred to as “scrap” in traditional manufacturing—represent a massive portion of the R&D budget. By allowing these costs to be recovered through a 5% to 10% credit, New Mexico effectively subsidizes the physical components of innovation.

Defining Qualified Expenditures under NMSA 7-9F-3

The eligibility of an expense begins with its classification as a “qualified expenditure.” Under New Mexico law, this term refers to any expenditure or allocated portion thereof made by a taxpayer in connection with qualified research at a qualified facility. The statute provides an inclusive list of costs that fit this description, ranging from fixed assets like buildings and equipment to variable costs like payroll and materials.

The Core Categories of Research Supplies

Within the specialized category of supplies and materials, the New Mexico Taxation and Revenue Department (TRD) identifies several distinct sub-types that are frequently claimed by technology firms. These items are often the subject of intense scrutiny during audits, as they must be distinguished from general administrative or production supplies.

1. Test Materials: This includes raw materials, chemicals, components, and specialized substances used to create prototypes or conduct lab experiments. For a satellite manufacturer, this might include specialized alloys used for a structural test model; for a pharmaceutical startup, it includes reagents and catalysts used in chemical synthesis.
2. Technical Books and Manuals: New Mexico is unique in its explicit mention of technical literature. This covers the cost of scientific journals, engineering manuals, and proprietary technical documentation required to guide the research process.
3. Consumables: These are items that are worn out or used up during the R&D process but are not considered “equipment” under standard accounting definitions. Examples include specialized gases (such as argon for welding experiments), disposable labware, and single-use sensors.
4. Computer Software and Upgrades: While software can be a long-term asset, New Mexico allows the purchase price and upgrades of software used directly in R&D to be treated as a qualified expenditure. This includes CAD (Computer-Aided Design) programs, simulation modeling tools, and data analysis suites.

Expenditure Type	Inclusion Status	Regulatory Notes
Raw Materials for Prototypes	Qualified	Must be consumed or rendered useless for commercial sale.
Laboratory Reagents	Qualified	Considered “test materials” under TRD guidance.
Scientific Journal Subscriptions	Qualified	Classified as “technical manuals.”
Standard Office Stationery	Excluded	Not directly related to a process of experimentation.
Commercial Packaging Materials	Excluded	Relates to production/sale, not research.

The Threshold of “Qualified Research”

For supplies and materials to be eligible, they must be used in “qualified research.” New Mexico adheres to a four-part test that mirrors the federal Internal Revenue Code Section 41, though the state’s application focuses heavily on the activity occurring within New Mexico borders.

To meet the state’s criteria, the research must be undertaken for the purpose of discovering information that is technological in nature. The application of this information must be useful in the development of a new or improved business component. Crucially, substantially all of the activities must constitute a process of experimentation related to a new or improved function, performance, reliability, or quality. This excludes research related to style, taste, or cosmetic design, as well as seasonal or routine data collection.

The Dual-Credit Structure: Basic and Additional

New Mexico provides two distinct layers of credit for qualified expenditures. Understanding how supplies and materials contribute to each is essential for maximizing the tax benefit.

The Basic Technology Jobs and R&D Credit

The basic credit is calculated as 5% (or 10% in rural areas) of the qualified expenditures made during a reporting period. This credit is primarily used to offset the taxpayer’s liabilities in three areas: the state portion of the Gross Receipts Tax (GRT), the Compensating Tax, and the state portion of the Withholding Tax.

Because the basic credit targets these “operating taxes,” it is particularly valuable for companies that are already generating revenue or have significant payroll. For a company spending $500,000 on research materials in a non-rural area, the basic credit would be $25,000. If that same expenditure happened in a rural county, the credit would jump to $50,000. The basic credit may be carried forward for a period of up to three years.

The Additional Technology Jobs and R&D Credit

The additional credit provides an extra 5% (or 10% rural) of the amount of qualified expenditures, bringing the total potential credit to 10% or 20%. However, the additional credit is applied against New Mexico personal or corporate income tax.

The primary hurdle for the additional credit is the payroll growth requirement. To be eligible, the taxpayer must increase their annual payroll expense at the qualified facility by at least $75,000 over their base payroll for every $1 million in qualified expenditures claimed. This link between material spending and job creation ensures that the state’s investment in research equipment and supplies results in tangible economic opportunities for New Mexico residents.

Credit Type	Rate (Urban)	Rate (Rural)	Tax Liability Offset
Basic Credit	5%	10%	GRT, Compensating Tax, Withholding
Additional Credit	5%	10%	Personal or Corporate Income Tax

Geographic Incentivization: The Rural Multiplier

New Mexico uses its tax code to address geographic economic disparities. The doubling of the credit rate for facilities located in “rural areas” is one of the most aggressive geographic incentives in the United States.

Defining Rural Areas

Under TRD guidance, a rural area is defined as any area of the state outside of an incorporated municipality with a population of 200,000 or more, based on the most recent decennial census. In practice, this currently excludes Albuquerque (Bernalillo County), Las Cruces (Doña Ana County), and Santa Fe.

For businesses that consume large amounts of materials—such as a chemical refinery or an advanced materials testing lab—locating in a rural county like Lea, Eddy, or San Juan can lead to massive tax savings. A $2 million expenditure on specialized testing supplies in Albuquerque yields $100,000 in basic credit, while the same expenditure in Roswell or Gallup yields $200,000.

Implications for Multi-Site Taxpayers

Large companies with multiple research facilities in New Mexico must track expenditures on a facility-by-facility basis. Supplies and materials purchased for an Albuquerque lab cannot be “shifted” to a rural facility’s books to take advantage of the 10% rate. The TRD requires that expenditures be made “at or within” the qualified facility.

Small Business Refundability and Cash Flow

For many pre-revenue startups, a non-refundable tax credit is of limited immediate use. New Mexico addresses this through the “Research and Development Small Business” provisions.

Eligibility for Small Businesses

A qualified R&D small business is an entity that employs no more than 50 employees and has total qualified expenditures of no more than $5 million in the taxable year for which the credit is claimed. These entities can claim the same basic and additional credits as larger firms, but they have access to a crucial refund mechanism for the additional credit.

The Refund Tiers

The state allows small businesses to receive a cash refund for the portion of the additional credit that exceeds their income tax liability. The amount of the refund is scaled based on the company’s total research spending to encourage sustainable growth.

Annual Qualified Expenditure Range	Refundable Portion of Additional Credit
Less than $3,000,000	100%
$3,000,000 to < $4,000,000	66.6% (Two-Thirds)
$4,000,000 to $5,000,000	33.3% (One-Third)

This tiered system ensures that a small bioscience startup spending $1 million on specialized test materials and lab payroll gets a full $50,000 cash refund (if non-rural) or $100,000 (if rural) for the additional credit portion, provided they meet the payroll growth benchmarks.

Local State Revenue Office Guidance: The Application Lifecycle

The New Mexico Taxation and Revenue Department (TRD) is the governing body for these credits. Their guidance emphasizes strict adherence to deadlines and documentation.

Step 1: Pre-Approval and Form RPD-41385

Before a taxpayer can claim any credit on their tax return, they must apply for approval from the TRD. This application is submitted on Form RPD-41385.

• Deadline: The application must be filed within one year following the end of the calendar year in which the expenditures were made.
• Requirements: The form asks for a description of the qualified facility, a detailed summary of the research project, and a breakdown of qualified expenditures.

For supplies and materials, taxpayers should be prepared to provide an expense summary that groups items by type (e.g., “Chemicals and Reagents,” “Mechanical Prototype Components,” “Technical Books”).

Step 2: Claiming the Credit

Once approved, the taxpayer receives a letter or certificate.

• Basic Credit: Claimed on Form RPD-41386. This must be filed within one year after the end of the reporting period to which the credit applies.
• Additional Credit: Claimed on the personal or corporate income tax return using Schedule PIT-CR or CIT-CR.
• Small Business Claim: Small businesses seeking a refund must use Form RPD-41298 in conjunction with their tax filings.

Audit and Record Retention

The TRD audits nearly all technology tax credit applications. Their auditors focus heavily on verifying that the materials were actually used for research rather than sales or general business operations.

• Documentation: Businesses must maintain records for at least four years.
• In-State Verification: Auditors may verify that contractors or consultants listed in the expenditures were actually performing work within New Mexico.

The Impact of Judicial Precedent: The PESCO Case

The case of PESCO v. New Mexico Taxation and Revenue Department (2014-2016) provides a critical lesson for businesses regarding the cost accounting of materials. PESCO, a manufacturer of oil and gas equipment, applied for research credits that were denied by the TRD.

The central issue was the “allocation of expenditure.” Under NMSA 1978 § 7-9F-3(G), if a qualified expenditure is an allocation of a larger cost (such as materials shared between research and production), the taxpayer must use the same cost accounting methodology they use in their other business activities. PESCO was unable to prove that its methodology for identifying R&D material costs was consistent with its general business accounting.

The court affirmed the TRD’s denial, reinforcing the principle that tax exemptions and credits must be “strictly construed” in favor of the taxing authority. For modern businesses, this means that tracking “test materials” must be done with precision. Simply estimating that “10% of our raw steel was used for R&D” is insufficient; there must be a clear, consistent accounting trail that justifies the allocation.

Comprehensive Example: Advanced Materials R&D in Silver City

To visualize the integration of these rules, consider a hypothetical scenario for “Gila Composites,” a small business located in Silver City (Grant County), which is a rural area. Gila Composites has 12 employees and is developing a new carbon-fiber reinforcement for mining equipment.

Expenditure Profile for Tax Year 2024

In 2024, Gila Composites invests heavily in its prototype phase:

1. Test Materials: They spend $300,000 on high-grade carbon fiber and experimental resins. These are consumed in destructive testing.
2. Technical Manuals: They spend $5,000 on specialized material science textbooks and database access.
3. Lab Equipment: They purchase a new curing oven for $150,000.
4. Facility Maintenance: They spend $40,000 on specialized venting and safety maintenance for the research lab area.
5. Payroll: Their total facility payroll is $800,000 (an increase of $100,000 over their 2023 base of $700,000).

Total Qualified Expenditures: $300,000 + $5,000 + $150,000 + $40,000 = $495,000.

Calculation of Basic Credit

Since the facility is in a rural area, the rate is 10%.

$$Basic\ Credit = \$495,000 \times 0.10 = \$49,500$$

Gila Composites applies this $49,500 against its New Mexico Gross Receipts Tax and state withholding tax liabilities throughout the year.

Calculation of Additional Credit

To qualify, Gila Composites must meet the payroll benchmark. For every $1 million in expenditures, they need a $75,000 increase. Since they spent $495,000, they need an increase of roughly $37,125 ($75,000 * 0.495). Their actual increase of $100,000 easily qualifies them.

$$Additional\ Credit = \$495,000 \times 0.10 = \$49,500$$

Refund Strategy

Gila Composites is a “qualified research and development small business” because it has < 50 employees and < $5M in expenditures. Since their expenditures are under $3 million, they are eligible for a 100% refund of any Additional Credit that exceeds their corporate income tax liability. If their NM corporate tax liability is $0, they receive a check from the state for $49,500.

Comparative Analysis: New Mexico vs. Federal R&D Incentives

While New Mexico’s credit is modeled on IRC Section 41, the definition of supplies and the methods of calculation diverge in ways that can affect the financial outcome of a project.

Broadening the Supply Definition

The federal credit focuses strictly on tangible property used in research, excluding land and improvements. New Mexico, however, includes “depletable land and rent paid or incurred for land,” as well as “buildings” in its definition of qualified expenditures. This means that for a New Mexico taxpayer, the “supplies and materials” category essentially extends to the physical environment in which the research occurs—a major departure from federal norms.

Calculation Methodologies

The federal credit typically uses an incremental approach (the Regular Method or the Alternative Simplified Credit), which rewards companies for increasing their research spending over a base period. New Mexico’s Technology Jobs and R&D Credit is a “flat” credit based on current-year spending (though the additional credit requires payroll growth). This makes the New Mexico credit more predictable and easier to calculate for early-stage companies that do not have long histories of research spending.

Feature	New Mexico R&D Credit	Federal R&D Credit (IRC § 41)
Geographic Focus	In-state (NM) research only	National (U.S.) research
Rent/Land	Qualified (includes land/buildings)	Excluded
Software	Broadly includes upgrades	Higher bar (Internal Use Software rules)
Small Business Refund	Yes (Additional Credit portion)	Yes (Payroll tax offset for startups)
Basis of Credit	Current year qualified expenditures	Incremental increase over base years

Economic Impact and Statistical Performance (FY24)

The New Mexico Legislative Finance Committee (LFC) produces regular assessments of the credit’s efficacy. The data from the FY24/July 2025 assessment highlights a program that is experiencing rapid growth in utilization.

Utilization Trends

In Fiscal Year 2024, New Mexico businesses received $11.2 million in state support through the Technology Jobs and R&D Credit. This represented a massive 125% increase over the previous year’s expenditure. This surge suggests that more companies are successfully navigating the TRD application process and that the 2015 amendments are finally reaching a broad cross-section of the state’s economy.

Job Creation and ROI

The credit is estimated to support approximately 165 new jobs per year. While the direct “cost per job” of $35,000 may seem high, the broader economic ripple effects are substantial. The credit contributes $20.9 million annually to the state’s GDP. The economic ROI of 92% indicates that the state is successfully using tax policy to foster an industry that would likely not exist at this scale without such incentives.

Statistic (FY24)	Value
Total Credits Claimed	$11.2 Million
Number of Claims	390
Estimated New Jobs	165
State GDP Impact	$20.9 Million
Economic ROI	92%
Revenue Recapture Rate	19%

Strategic Implications for New Mexico Businesses

For technology companies in New Mexico, the “meaning” of supplies and materials is not merely a semantic point of the tax law; it is a strategic lever for financing growth. To fully capitalize on this incentive, firms must integrate tax planning into their R&D lifecycle.

Optimizing Procurement for Tax Efficiency

When purchasing supplies, businesses should prioritize New Mexico-based vendors where possible. While the credit applies to materials used at a New Mexico facility, the “consultants and contractors” portion of the credit is strictly limited to those performing work in-state. Aligning procurement with the state’s geographic goals can simplify the audit process and demonstrate a commitment to the local economy.

Addressing the Consistency Requirement

Given the precedent set by the PESCO case, firms should ensure that their accounting software is configured to track R&D material consumption at the project level. This “granular” tracking allows for the seamless generation of the expense summaries required by Form RPD-41385.

Future Outlook

The Technology Jobs and Research and Development Tax Credit currently has no expiration date and no aggregate expenditure cap. This provides a stable environment for long-term research projects that may span multiple years. As the state continues to focus on industries like green energy, space technology, and cybersecurity, the definitions of “test materials” and “qualified research” are likely to evolve to include more digital and intangible inputs.

Final Thoughts: A Catalyst for Scientific and Economic Progress

The New Mexico Technology Jobs and Research and Development Tax Credit is a powerful tool for reducing the “burn rate” of innovative companies. By providing a generous credit for the tangible supplies and materials consumed during the process of discovery, the state legislature has created a mechanism that rewards scientific risk-taking. From the high-tech laboratories in Albuquerque to the emerging aerospace facilities in rural counties, this credit supports the physical infrastructure of the 21st-century economy.

The nuanced understanding of what constitutes a “qualified expenditure”—including the specific inclusion of technical literature and the broad treatment of facility costs—gives New Mexico a competitive edge over other states with more restrictive R&D policies. However, the benefits of the credit come with a mandate for transparency and precision in accounting. For the business professional, mastering the definitions and regulatory guidance surrounding research supplies is more than a compliance task; it is an essential component of a successful, state-supported growth strategy. By linking material expenditures to job creation and geographic development, New Mexico has ensured that its investment in science is also an investment in the prosperity of its people.