The R&D Tax Credit Aspects of Alabama

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        Innovation is a central focus in Alabama’s current economic strategy.  Manufacturing  is the number one industry in the “Heart of Dixie”.  Manufacturing is very R&D intensive and innovation oriented. The state's manufacturing sector reportedly employs a larger share of the state's population than any other U.S. state.  With over 300 chemical manufacturing companies statewide, chemical engineering & manufacturing dominates in this sector.  

        Agriculture is another important sector in Alabama.  Alabama's agricultural production is dominated by the production of broiler chickens. Almost 60% of the state's livestock production is generated by these young chickens. The poultry industry boosts the Alabama economy by $10 billion annually.  Innovations in this sector involve everything from developing antibiotics to more effiicent slaughtering techniques.

        The aerospace industry is also extremely innovative and Huntsville is home to NASA’s building of the Saturn V rocket, which was the first rocket to put humans on the moon.  Since then, the industry has grown to include at least 300 aerospace  companies.

        Alabama's automotive industry is significant as well with more than 1 million cars and light-trucks produced in 2015, setting an annual automotive production record for the state.  Innovation is central in this industry.  New product offerings drive car sales and parts makers must conduct research and development in order to keep the pace with original equipment manufacturers. 


The Federal R&D Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  

        On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.


        Manufacturing is an extremely innovative industry in any state.  In Alabama it is central to the state’s economy. Manufacturers in Alabama account for 17.77 percent of the total output in the state, employing 13.23 percent of the workforce. Total output from manufacturing was $34.40 billion in 2013. In addition, there were 257,800 manufacturing employees in Alabama in 2013, with an average annual compensation of $60,945.   Those manufacturing employees made up a larger share of the state's population than any other U.S. state.  

        Manufacturing is extremely R&D intensive.  Innovations in this industry include new product developments, improvements on existing products, and process improvements.  Discovering ways to increase productivity, integration of new equipment, and design of state-of-the-art facilities also involve innovation.

        Chemicals  are the most important products manufactured in Alabama in terms of value added.  They are the number two exported product in the state.   Innovations in the U.S. chemical industry are central to our modern standard of living.  Chemical engineers use raw materials such as oil, natural gas, air, water, metals, and minerals to create products we use on a daily basis.  Plastics, rubbers, fibers, polymers, semi-conductors, explosives, detergents, pesticides, clothing, and even food products all involve some level of chemical engineering.

        R&D credits are also available for food science  manufacturing companies.  The U.S. food industry is undergoing monumental changes as it faces issues of genetically modified ingredients , educating consumers, and shifting to a larger focus on environmentally and health friendly activities.

         Innovation in the food processing industry involves changes to flavor, texture, temperature, customs, and consumer price constraints. Many companies incorporating better ingredients, such as organic ingredients , face challenges in finding supplies of suitable ingredients. Companies are incorporating improved processes and techniques, confronting the issues of whether the new processes and techniques are safe for consumers and whether they can be used on a large-scale.  


        Agriculture is also an important industry in Alabama. Alabama farmers sell nearly $4 billion worth of poultry each year.  While most of Alabama's agricultural production is in livestock, 18% is in crops with greenhouse, nursery, and sod products leading the way.

        Poultry, which has a $15 billion economic impact and supports more than 86,000 jobs is growing across the state. Last year, the sector added 615 new or expanded poultry houses, for a combined construction investment of $296 million. That’s up from 129 new or expanded facilities and a $30 million investment in 2010, with the numbers increasing gradually each year.

        Innovation in this industry involves everything from state-of-the-art irrigation systems, to new machinery development, to big data  analytics and genome research.  According to the United Nations, the world population is expected to reach 9.6 billion by 2050. In order to meet this unprecedented demand, global food production will have to increase by 60 percent, in relation to 2005/07 levels.  Climate change, water scarcity, and workforce and land availability pose major challenges to this goal, putting the agricultural industry under great pressure to innovate .


        The aerospace industry in Alabama is more than 100 years old, starting with the Wright Brothers’ establishment of a civilian flight school in 1910.  Today, there are over 300 aerospace and defense companies in Alabama including: Airbus, Sikorsky, Lockheed Martin, Bell Helicopter, Boeing, Northrop Grumman, GE Aviation, Airbus Military, GKN, General Dynamics, BAE Systems, Goodrich, Teledyne Brown, Pratt & Whitney and Raytheon.

        The aerospace industry is one of the most competitive industries . Cost reduction and innovation is a necessity in this sector.  Boeing, for example, does everything to stay competitive; including collaborating with suppliers as well as introducing more automation technology into manufacturing.  In recent years, there has been a major demand for new aircraft around the globe.  This demand has created a huge order backlog that has yet to be fulfilled. Process improvements and efficiency innovations on the manufacturing floor are therefore critical.  Research and Development tax credits are available for these efforts.

Information Technology    

        Information technology is an extremely innovative industry.  In Alabama, Information Technology is particularly prevalent in the Huntsville/ Madison County area of the state with more than 300 international and domestic corporations operating in that area.  These companies develop a range of technologies such as modeling and simulation technologies, cyber security , and data centers. Their work ranges from the design and production of electronics and computer-related technology to the manufacturing of technology hardware to the making of sensors and radars for advanced missile systems.

        The future for this industry in Alabama looks bright.  Computer systems design and management services are projected to increase employment by more than 650,000 jobs in the next five years.  In North Alabama, Google is building $600 million data center.  The state is attractive to Google because state laws provide competitive incentives for data center projects.  Most of these data center projects also involve some level of Research and Development.   


        The automotive industry is critical to Alabama’s economy. Alabama ranks 5th in the U.S. in car and light truck production.  One-fourth of all passenger vehicles built in the south are made in Alabama.

        Today’s automobile is the most sophisticated technology owned by consumers. From the early stages of planning, automakers design innovations into new vehicles.  Virtually every aspect of the modern automobile is now high-tech, using a high-tech material, or was developed through a high-tech process. As a result, automakers rank at the top of lists on most innovative companies, and automakers are recognized leaders in R&D investments, in Alabama, the U.S. and globally.  


        Innovation is a central focus in Alabama’s current economic strategy.  When companies innovate, develop products and improve processes they may be eligible for federal R&D credits which are available to stimulate innovation.   

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