The R&D Tax Credit Aspects of Alaska



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Alaska
    The Alaskan economy is technologically advancing and innovation driven.  Major economic sectors include oil and gas, tourism, aquaculture/fishing and professional services.  Major technological advances are occurring in each of these sectors.  In the oil and gas sector, innovative applications include the development of novel drilling and fracking methods, intelligent data analytics and the development of tools, drills and equipment.  Tourism industry advances include virtual reality applications, advances in the sharing economy, biometrics and customer centric mobile applications such as GPS, paperless boarding passes, automated itinerary generation, etc.   Aquaculture/fishing industry technological advances include genetic engineering, preservation technologies and state-of-the-art disease prevention measures.  When Alaskan businesses develop and integrate technologies such as these they may be eligible for Federal Research and Development (R&D) Tax Credits which are available to stimulate innovation.


The Research & Development Tax Credit

    Enacted in 1981, the now permanent Federal Research and Development (R&D) Tax Credit allows a credit that typically ranges from 4%-7% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • Must be technological in nature
  • Must be a component of the taxpayers business
  • Must represent R&D in the experimental sense and generally includes all such costs related to the development or improvement of a product or process
  • Must eliminate uncertainty through a process of experimentation that considers one or more alternatives

    Eligible costs include U.S. employee wages, cost of supplies consumed in the R&D process, cost of pre-production testing, U.S. contract research expenses, and certain costs associated with developing a patent.

    On December 18, 2015, President Obama signed the PATH Act, making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax for companies with revenue below $50MM and for the first time, pre-profitable and pre-revenue startup businesses can obtain up to $250,000 per year in payroll taxes and cash rebates.


Oil & Gas

    The oil and gas industry is the largest component of Alaska's economy.  Nearly 85 percent of the state budget is supplied by oil revenues.  The sheer quantity of oil and gas resources in Alaska are enormous.   Alaska's waters are believed to contain more than 30 percent of the nation's known recoverable off-shore resources.  Alaska's oil and gas industry has produced more than 17 billion barrels of oil and 13 billion cubic feet of natural gas.   The petroleum industry supports one-third of all Alaskan jobs, generating 110,000 jobs throughout the state.
Several Alaskan equipment, supplies and tools manufacturers develop and engineer tools, drills and equipment to support this massive economic sector.  Some of these companies with operations in Alaska are listed below.

Alaska Instrument Company, LLC.
    Alaska Instrument Company, LLC. provides application engineering in the field of industrial instrumentation, control, and piping systems.  Alaska Instrument is the largest manufacturer representative in Alaska, currently representing over thirty manufacturers of process control equipment.

Alaska Rubber and Supply, Inc.
    Established in 1980, Alaska Rubber and Supply, Inc. in Anchorage Alaska  provides access to numerous oil and gas industry products such as industrial and hydraulic hoses, fittings, accessories, conveyor belts, rigging supplies, and petroleum handling equipment.  They also provide a range of services including pull testing, hydrostatic pressure testing, hose fabrications and engineering and design activities.  The Alaska Rubber Group has locations throughout the State in Fairbanks, Wasilla, Anchorage and  Kenai.

Baker Oil Tools
    Baker Oil Tools in Deadhorse, Alaska designs and engineers a full portfolio of energy products including software, advanced analytics, controls and sensing, drillbits, piping, tubing, etc.  These products & services include an array of applications in upstream, midstream and downstream oil and gas production. Asa GE subsidiary company (NYSE:BHGE) they are the world’s first and only fullstream provider of integrated oilfield products, services and digital solutions.


Tourism

    Tourism is a significant contributor to the Alaskan economy.  Over 2 million out-of-state visitors travel to Alaska annually.  These visitors spend over $2billion annually during their time in Alaska.   Southeast Alaska is the most visited part of the state, with two-thirds of all tourists coming to the region.  These tourists contribute one-third of all Alaskan visitor spending, an estimated $657 million in 2016.  

    Big data, artificial intelligence and other electronic technology applications have recently propelled the tourism industry into the 21st century.  e-Tourism can be defined as the analysis, design, implementation and application of IT and e-commerce solutions in the travel & tourism industry.  Applications of this technology on the consumer end involve GPS tour guides, mobile application based mapping and tracking techniques, virtual reality applications designed to provide travelers with a tour of preferred vacation destinations which can be explored before arrival, security applications at border crossings/airports (such as biometric scanning technologies) and computer databases laden with passenger centric data for instant analysis.



Virtual Reality

    For many travelers, the vacation experience starts long before a traveler arrives--it begins with the first visit to a location website, when a person sees photos of the location and gets a sense of what to expect.   Virtual reality applications can also help convince customers to choose a location.  

    Other electronic applications allow users to book vacations, and plan itinerary details. Navitaire, a travel technology company (owned by travel tech giant Amadeus) is currently developing technology which allows users to view alternative airline routes and pick their airline utilizing virtual reality based technology.  Once they’ve selected a flight, they can compare seats on the plane, test out rental cars, pick up a virtual credit card (linked to a real credit card) and pay for their entire trip.  This all-encompassing ability could provide a solution to real problems faced by vacation planners.

    According to one study by Google, travel consumers typically make 350+ digital touchpoints before booking a vaction.  By combining photos, videos, 360 images as well as purchase and booking functionality into a single experience, a traveler can now access all the information they need in one interface resulting in significant planning and time savings.


Data Analytics

    Big Data provides numerous applications in the tourism sector.  Airline operators use it to understand passenger behavior, analyze traveler trends, create tourism profiles and direct marketing efforts.  Tourists use predictive analytics to make decisions based on weather and traffic patterns, available lodging and to compare price offerings.   Which hotel is the most pertinent for a young couple who just booked their flights for next summer holidays?  Which alternative route contains the least traffic?


Mobile Applications

    Mobile based tools and applications are beginning to dominate the travel booking sector.  A recent survey by eMarketer shows that travel-based mobile apps are the 7th most downloaded mobile application category and that 60% of smartphone users prefer travel apps for planning their leisure tours.  Tourism mobile apps help users for planning travel, accommodation bookings, ticket bookings, cab booking, route mapping, and more.

    The Alaska app is an Alaska based tourism mobile application which helps users find nearby attractions, create trip itineraries, view weather forecasts and provides over 350 audio guides, 500 videos and over 10,000 Alaskan photos.


Aquaculture/Fishing

    Alaska is heavily dependent on aquaculture and fishing. Alaska's fish catch is the most valuable among the 50 states.  Large catches of cod, flounder, pollock, rockfish, sablefish, salmon, and smelt drive the industry.  Each year nearly 6 billion pounds of seafood are harvested.  Alaska is the number one producer of wild salmon in the world and has the only salmon industry certified as "sustainable" by the Marine Stewardship Council.

    Innovations in this sector include fish farms, aquaponics, innovative fishing nets, development of antibiotics, genetic engineering and an almost endless list of additional technical advances.  Electronics for fish finding, satellite-based technology for navigation and communications, onboard conservation and increased use of outboard engines have all contributed to the major expansion of fisheries and aquaculture in recent decades.  Technical advances have generally led to more efficient and economical fishing operations, reduction of the physical labour required per unit of output and improved access to resources.

Kodiak Seafood and Marine Science Center
    The Kodiak Seafood and Marine Science Center in Fairbanks promotes the sustainable use of Alaskan fisheries through collaborative research, application, education and information transfer.  Recent R&D initiatives involved the development of safe handling and preservation techniques, the research of spoilage prevention measures, enhancing nutritional content, the effects of capture, handling and processing procedures, by catch reduction, offal discharge management and energy efficient processing developments.
 


Professional Services

    Engineers, architects, lawyers, accountants, business managers, and other professionals account for sixty percent of the professional services sector in Alaska.  Local firms provide services for a wide variety of public and private projects and organizations throughout Alaska.  Many of these projects are tied to the heavily anchored Alaskan oil and gas industry. The rise and fall of professional and business services employment over the past decade has followed the same trend as oil prices and revenues, which peaked in the 2012-2013 period.  Mining projects throughout the State typically require significant engineering, planning, and social science research, as well as administrative support services.   Technology advancements in this sector largely involve artificial intelligence, data analytics and other digital applications.


Automation

    Many of the routine and less sophisticated professional services tasks are being automated in an effort to drive efficiencies and stay competitive.  By automating routine tasks, technology is freeing people to focus on solving higher-order problems.  

    Solve It in Anchorage provides, professional services to the small and micro businesses in the Alaskan community. Services include network management, IT systems integration, cyber security, automation, etc.

Cloud Servers

    Cloud servers provide a location for electronic data storage much like a dedicated and physical server. However, instead of being hosted on physical hardware that’s solely used by one business or individual, they reside in a shared “virtualized” environment that’s managed by a cloud hosting provider. Users benefit from the economies of scale by sharing hardware with other users. The benefit is that users only pay for the exact amount of server space used allow businesses to scale resources up or down, depending on demand, so that they’re not paying for idle infrastructure costs when demand is low.  This type of data storage is becoming increasingly popular and utilized by many successful services.


Communication

    Advances in business and professional services communication technologies allow companies to operate efficiently across large geographical distances.  Communication advances include video-based tele-conferences, social media, server virtualization and mobile based applications which provide real time updates on incoming e-mails, text messages and other electronic notifications.  Technology has changed business in many ways, but its affect on communication is arguably the most significant. Technology allows individuals to communicate and carry on a business relationship without ever meeting face to face, so people in all parts of the world now have the chance to interact with a company in a rural part of the United States.  This is particularly relevant for Alaskan businesses whom often have deep relationships with mainland based U.S. colleagues and must interact daily across geographical distances thousands of miles away.



Conclusion

    The Alaskan economy is innovative and technology driven. Major economic sectors include oil & gas, tourism, aquaculture and professional services. Federal Research and Development tax credits are available to stimulate innovation in Alaska.  

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.


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