Small businesses and cash crunches go together like rising Fed rates and higher cost loans. It’s always something. Customers take their time paying. Commodity prices jump. Foreign shipments are delayed, thereby pushing back production schedules. All too often there is a real need for a quick cash infusion. Since 2001 an increasing number of technology businesses have found that infusion coming, believe it or not, from the state government.

New Jersey’s Economic Development Authority (NJEDA) now allows qualifying high-tech and bio-tech companies to sell off the potential tax deductions from their net operating losses (NOLs) to other in-state corporations in need of those very deductions.

There are rules attached to this transfer and the New Jersey Technology Council explains them in a workshop taking place on Tuesday, April 18, at 9 a.m. at the Technology Center of New Jersey at 675 Route 1 in North Brunswick. Cost: $40. Visit to register. Panelists for the event, titled “Selling Your Net Operating Losses,” include Jay Shah, CFO of the East Windsor-based software development company, CareGain (; John Rosenfeld, assistant director of program services for the NJEDA; Iris Chung, tax manager, PricewaterhouseCoopers; and Will Steffens, area development manager, PSE&G.

For over two decades, Shah has been worrying over and struggling to manipulate the cash flow of various companies — both his own and others. Born and raised in Bombay, India, Shah crossed the Pacific to attend New York University, earning a bachelor’s in accounting in l980. After earning his MBA from Columbia University, he took his accounting and business skills to several publishing firms along the East Coast. At one point he was CEO of Buckle Down Publishers in Massachusetts.

For the past year Shah has served as CareGain’s CFO. As a developer of custom software systems for the healthcare industry, CareGain qualifies both as a “provider of emergency service” and as a “new/expanding technology or biotechnology company,” two of the designations required for New Jersey’s Tax Benefit Transfer Program.

CareGain’s decision to mortgage their future tax savings for quick cash now was, for Shah, the right and obvious choice. “We simply needed the capital to meet our operating expenses this year,” he says. “The sale gave us what we needed with the least risk and allowed us to expand.”

Buying time. CareGain’s operating profile made the company an ideal candidate for the program. Developing software involves intensive (and expensive) manpower, but it may not yield a profit for a long time. Even after the product is finally ready, it does not move quickly off a retailer’s shelf, with quick cash returns. Instead, each software package is individually installed by CareGain staff, which translates into a slow, drawn out payback. So, even in its fifth year, the firm faces long dry spells.

Lowering pay-back strain. As opposed to hunting for VC funding or applying for a loan, Shah applied to the NJEDA, reasoning that the Tax Benefit Transfer Program would provide a lower pay-back strain and less intrusion from outside sources.

“You are getting money from a sale of your deductions, but it is not at all free money,” says Shah. After CareGain’s application was approved by the NJEDA, Shah hired a specialized, independent accounting firm to determine exactly what operating expenses could be declared as tax losses. Technically, any time a business’ deductions exceed its income, it can claim a net operating loss (NOL) and it can carry that loss forward or back, applying it to years with a net gain.

In the Tax Benefit Transfer Program, however, only unused losses to be carried forward may be sold. Under the same program, companies may also sell their Research and Development Tax Credits, dating back to January 1, l999. The seller pays a flat fee to the NOL auditor. Then, if the seller can successfully hawk his tax deductible NOLs, the purchasing company will pay the seller a preset rate of 75 cents for each dollar of usable NOL.

Creating a win-win situation. While the party selling NOLs gets only 75 percent of their value, minus auditor fees, remember that these are tax deductions traded in for real dollars — in hand, today. Shah was thrilled with the deal.

Not surprisingly, the largest purchaser of tax benefits such as CareGain’s, is PSE&G. Energy companies have harvested a bumper crop of taxable profits this year, which they would like to shelter. PSE&G qualifies as a state-residing S or C type corporation, and meets other legislative strictures. As a result, it may purchase NOLs up to 50 percent of its actual tax liability. These are applied, dollar for dollar, against the company’s own tax bill, at the same rate as would have been used by the selling company.

Helping out New Jersey. It doesn’t much matter to the state’s tax coffers whether a legitimate tax deduction gets subtracted from CareGain’s tax liability or from PSE&G’s. Further, by ensuring that companies like CareGain can continue and expand, the state has hopes of gleaning even more tax income as the firm grows. More taxes, more new technology, more emergency services provided in the state: it’s a good deal.

Federal limits. Many of the high tech companies, particularly dot-coms, which recently rose and suddenly crashed, have lying within their rubble excellent, usable technology and top-notch talent. They also have huge operating loss statements, which have set their more healthy counterparts salivating with the urge for acquisition. But beware. The potential for applying a newly-purchased firm’s NOL to your own tax statement is extremely limited according to the federal tax code. The federal tax code currently allows that, at best, a mere 5 percent of the newly acquired company’s NOLs can be used as deductions.

In the end, Shah made the right move for CareGain. As of January, 2006, CareGain experienced every software developer’s dream outcome. It was purchased by the Fiserv Inc., a complete medical administrative service provider, which is based in Minneapolis. Meanwhile, CareGain is planning to keep the plant located in East Windsor, with virtually all its current staff. The proceeds from its NOL sale helped to keep it afloat and healthy until the acquisition was complete.

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