The R&D Tax Credit Aspects of Boston Start-Ups



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Boston-Start-Ups
        The Boston area is known for being one of the nation’s prime innovation hubs.  With world class universities like MIT, Tufts and Harvard nearby, and a local community of private investors, the city has a unique tech culture, one that is collaborative in nature.  In 2014, Boston’s innovation economy raised $4 billion in funding—up $1 billion from the previous year.  State-wide, there are over 40 university and industry accelerators to help start-ups find the resources to grow their ideas into a successful business.   Additionally, Boston is home to a number of incubators such as Blade, Bolt, Cambridge Innovation Center, Greentown Labs, Healthbox, LearnLaunch, MassChallenge and the Venture Development Center.

        The city is also home to a number of start-ups that use local incubators for a number of services from lab equipment usage to accounting and advising support.  Artlifting, a Boston-based company founded in November 2013 is an online art marketplace that provides homeless, disabled and other disadvantaged people an outlet for selling their artwork.

        Greensight Agronomics, also located in Boston, provides daily, automated imaging and analysis of geographic terrains from the sky.  Currently, they are building quad-rotor drones that work at golf courses. The drones will capture images of the grass, which will let groundskeepers see areas that might need more or less water — or a spot application of pesticide.  

        When start-ups such as these develop technology they may be eligible for Federal and State Research and Development tax credits which are available to stimulate innovation.  


The Research & Development 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.


The R&D Tax Credit for Start-Ups

        The new federal tax law is extremely beneficial for start-ups.  For the first time ever, a qualifying start-up can use the credit against $250,000 per year in payroll taxes beginning January 1, 2016.  Essentially, with the new start-up provision, companies can claim the credit even if they do not pay income tax and regardless of their profitability.
 
 Tax Credit Example
        A company owes $300,000 in payroll taxes and they qualify for $100,000 in R&D tax credits. The R&D credit can now be applied to payroll taxes. Therefore, the amount of the payroll tax that has to be paid is reduced to $200,000. The most amount of money that can be deducted annually from the payroll R&D Tax Credit is $250,000. Therefore, if the company qualifies for $300,000 in R&D credits, the company would now only owe $50,000 in payroll taxes.

The Massachusetts State R&D Tax Credit
Massachusetts offers a state version of the R&D tax credit as well.  This tax incentive was designed to remove any obstacles to R&D investment in order to spur growth and innovation throughout the Commonwealth.  The state tax credit closely resembles the federal credit program.  However, it specifically offers Massachusetts companies a few extra unique features for doing business in the state.


Software & Mobile App Start-Ups

        Since 2002, software has been the number one industry sector for angel investments every year.  More angel investment dollars go to software start-ups then start-ups in any other industry.  This includes mobile app development which is heavily software based.  Boston has a number of tech start-ups developing software and mobile apps, including but not limited to the following:

        PlateJoy: PlateJoy is a Cambridge-based software company that simplifies the process of planning out weekly meals for an entire household. By simply telling the service some basic details, such as family size and dietary preferences, PlateJoy will recommend recipes and deliver the ingredients within 24 hours.


        Runkeeper: Runkeeper is a Boston-based software start- up.  The Runkeeper app uses GPS technology found in your phone to track your fitness activity. The company claims they can give the user results comparable to an expensive GPS watch, at a fraction of the cost. Once the user’s activity is complete, the data is synced to their website, where a history of all tracked activities can be viewed.  Additionally, there are a few different tools to both measure and improve your fitness.


        SCVNGR: In 2011, Cambridge-based mobile app developer SCVNGR launched a new mobile payments  application platform called LevelUp. Using QR technology, the product attempts to reengineer the formula with game mechanisms and location to benefit both the consumer and the merchant. LevelUp users can locate nearby deals through the iPhone or Android app.

        Upon purchasing and using the first deal at a partner merchant, the customer has effectively completed Level 1, and unlocked Level 2, which offers better deals. When the customer returns to the same spot and uses a Level 2 deal, Level 3 deals, which offer the highest value, are unlocked. The idea is that first-time diners will turn into regulars as they progress through the leveling-up process.

        According to SCVNGR founder Seth Priebatsch, “LevelUp is a new type of location-based interaction. It combines the best parts of the check-in, the challenge, and the reward into one bite-sized unit”. 


        docTrackr: docTrackr, also based in Cambridge, helps businesses keep their documents safe and under control, no matter where they are stored or whomever they are shared with. Users can remotely destroy, update, and track changes and sharing in real-time.


        CoachUp: CoachUp is a venture-funded start-up company that connects athletes with private coaches. With thousands of coaches across the country, and hundreds of training sessions happening every day, they are the nation’s leading private coaching company. The CoachUp team is comprised of both athletes and coaches, including founders Jordan Fliegel and Arian Radmand.


Biotech Start-Ups

        The greater Boston area, especially Cambridge, is host to large biotechnology industry.  Most of the biotech start-ups in the region appear to be focused on pharmaceutical and biotech drug discovery, such as:

        Editas Medicine: Editas Medicine is a discovery-phase pharmaceutical company based in Cambridge, which aims to develop therapies based on CRISPR-Cas9 gene editing technology. CRISPR is a dynamic, versatile tool that can target nearly any genomic location and potentially repair broken genes.  

        Moderna Therapeutics: Modern Therapeutics is a Cambridge-based RNA therapeutics  company seeking to battle disease by stimulating the body to make its own treatments. More specifically, it’s using messenger RNA to stimulate protein growth. For example, stimulating regrowth of heart cells after a heart attack, or stimulating the growth of a protein that would kill cancer cells. The company currently has 16 ongoing research programs, eight of them with AstraZeneca and two of them with Alexion.

        T2 Biosystems: Located in Lexington, T2 Biosystems has developed a technology that provides faster and more accurate diagnosis of infectious diseases in hospitals. The diagnostics technology is part medical device, part biotechnology and part software algorithm.


Advanced Manufacturing Start-Ups

        The Greater Boston region has a thriving advanced manufacturing industry. This industry includes an intricate network of collaborative relationships between industry, government and education. It is here that exists a high concentration of innovative firms that interact with each other to advance design and production methods. These industry clusters include the following subsectors:
  • Signal processing, navigation, optics, and measurement
  • Medical devices and biotechnology
  • Semiconductors and complex electronics
  • Precision machining
  • Aerospace
        The rapidly accelerating rate of technological innovation is changing the environment in which advanced manufacturing exists. Three disruptive technologies have emerged that could significantly change the advanced manufacturing industry: 1. Digital design and prototyping 2. Additive manufacturing and 3. The Internet of Things (IoT).

        This kind of advanced manufacturing has spurred talk of a U.S. manufacturing rebirth. In 2012, President Barack Obama announced a billion-dollar initiative to support it, noting 500,000 manufacturing jobs added in the previous two years. Hillary Clinton uses the phrase, “advanced manufacturing” regularly. President Donald Trump also uses the phrase as part of his “Make America great again” campaign. Some advanced manufacturing start-ups in the region are discussed below.

        Uniquarta Inc.: Uniquarta is a Cambridge-based manufacturer of semiconductors and other electronics. They manufacture flexible, silicon chips that are 5 to 10 times thinner than normal. These devices have a number of advantages over conventional electronics, including:
  • Ability to conform to the shape of their host structures
  • Ability to be embedded or placed where rigid circuit boards cannot
  • Reduced size and weight
  • More rugged and durable
  • More environmentally friendly
  • Reduced cost
        Tulip Products: Tulip Products, based in Somerville, Massachusetts, is a technology company that helps transform the manufacturing process by bringing the latest technological advances from the lab to the shop floor. Tulip combines data streams from sensors, existing shop floor equipment and operator inputs in real-time to help manufacturers increase efficiency and production.


Robotics Start-Ups

        Boston is considered to be one of the world’s leading robotics centers.  Spending on robotics worldwide is expected to reach $65 billion by 2025, from $15 billion in 2010, according to the Boston Consulting Group, a management consulting firm.

        Empire Robotics: Empire Robotics is a Boston, Massachusetts based robotics manufacturer.  The start-up company specializes in flexible robotic end-effectors that leverage the jamming phase transition of granular materials. Founded in 2012, Empire's team of soft robotics experts, materials scientists, and experienced automation engineers serve diverse technology fields including agile manufacturing automation and collaborative robotics. Across a broad range of applications, Empire's products enable secure grasping and manipulation of widely varying objects with a single inexpensive tool.

        Silverside Detectors:  Cambridge, Massachusetts based robotics start-up company, Silverside Detectors, employs a staff of nine, one physicist, five engineers, two business people and one assembly worker. The four year old start-up is putting together devices that can flag the presence of a nuclear bomb. The company promises to deliver highly sensitive detectors at a low price.  They keep spending down by doing everything, from assembly to testing, on their own. Silverside performs in-depth quality testing of every single product coming off the line in its Cambridge office.  This is precisely the type of activity that the R&D Tax Credit aims to incentivize.  

        Vecna: Located in Cambridge, Massachusetts, Vecna is a robotics logistics company.   Its robots include the "BEAR" (or Battlefield Extraction-Assist Robot), the QCBot, which is being used to deliver medication to patients and VGo, a telepresence robot technology acquired by Vecna last year.


Conclusion

        The Boston area is one of the prime innovation hubs in the nation.  Common innovative start-ups there include software developers, mobile-app designers, manufacturers, robotics companies and more.  New R&D Tax Credit legislation is aimed particularly at start-ups who may be eligible for both Federal and State R&D Tax credits which can now be used to offset payroll taxes.   

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