The R&D Tax Aspects of Colorado Innovation



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Colorado-Innovation
        Ranked as the nation’s fastest growing economy by a recent Business Insider report , Colorado noted a 3.8 percent growth in state gross domestic product last year. With a much diversified economy, the state stands out for its strong aerospace sector and its growing energy and high-technology sectors.

        Outpacing expectations for 2014, Colorado has attracted significant investment and relocations. The present article will discuss Colorado’s most innovative industries and present the federal and state R&D tax credits available to support them.   


The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent 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 January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.


Colorado State Tax Incentives

        In an effort to encourage job creation and capital investment in economically distressed areas, the state of Colorado offers a research and development income tax credit for companies located in designated locations, known as enterprise zones (EZs).  Expenditures on research and experimental activities in an EZ can qualify for a tax credit that corresponds to 3 percent of the difference between the qualified research expenses (QREs) incurred during the tax period and the average QREs from the previous two income tax years.

        The total amount of the credit must be spread equally over four years, which means that the taxpayer can claim 25 percent of the credit in the year the expenditure is made and the remaining 75 percent of it during the following three years.

        Research expenses may include wages, supplies, payments to the right to use computers, and payments for research done by a third-party for the benefit of the contracting firm, as long as it is performed within an EZ. 

        A precertification by the zone administrator is required prior to any business activity that would generate R&D credits. Both the precertification and the final certification for the tax credits can be made via an online process.

        The state also provides biotechnology sales and use tax refunds for the biotechnology industries. Qualified taxpayers can claim a refund for previously paid tax expenses on equipment and supplies used for research and development. The incentive concerns purchases of tangible personal property used directly in R&D activities, such as microscopes, chemical reagents, and software. 


Colorado’s Startups and STEM

        Among the ten best places for STEM graduates, Colorado is number three in the country for the number of adults with a bachelor’s or higher degree.  This smart and active workforce has attracted entrepreneurs and corporate headquarters.

        According to the startup accelerator Built in Denver, Colorado launched 122 startups and saw 20 successful exits in 2012. Overall they raised more than $502 million, most of which went to software companies (45 percent) and B2B web firms (33 percent).  

        The state’s capital, Denver, was named the second best city in the country to launch a startup in 2014.  A growing number of millennials between 25 and 34 years old are choosing to migrate to Denver, drawn by its lifestyle, access to education, and unique urban environment.


Colorado’s Main Industries

        Colorado is home to a growing number of engineering and R&D intensive companies serving a variety of advanced industries, such as advanced manufacturing, aerospace, bioscience, electronics, energy and natural resources, infrastructure engineering, and technology and information.

        Colorado’s Office of Economic Development and International Trade (OEDIT) estimates the economic impact of these industries at nearly 30 percent of the state’s wage earnings, nearly 30 percent of the total sales revenues across all industries within the state, and nearly 35 percent of the state’s total exports.

The following sections provide an overview of Colorado’s most innovative industries. 
   

I.    Advanced Manufacturing and Electronics
        Colorado is at the forefront of bringing advanced manufacturing back to the U.S. The state’s manufacturers are highly innovative and use advanced processes to serve diverse sectors, from electronics and consumer products to clean energy systems, aerospace vehicles, and medical devices.

        Colorado’s advanced manufacturing industry is diverse and geographically distributed across the state, with over 5,900 manufacturing firms, more than 120,000 employees, and $16.3 billion in annual economic output.

        The state is home to more than 300 manufacturers and distributors of electronics products, components, and services. Headquartered in Inverness, Arrow Electronics is a fortune 500 company and Colorado’s largest revenue generating company.

        The Colorado Robotics Association congregates nearly 30 companies that offer highly innovative automation solutions. Thornton-based manufacturer of robotic package handling systems, About Packaging Robotics, and Denver-based startup Carbide Robotics, which creates advanced spherical robots for the assessment of dangerous situations, are two examples.

        The widespread adoption of robots throughout the U.S. economy promises to create major R&D tax credit opportunities and to favor the growth of Colorado’s robotics industry.


II.    Aerospace
        Colorado is the second state in the nation for private sector aerospace employment. It is home to four military commands (Air Force Space Command, Army Space Command, NORAD, and USNORTHCOMM) and three space-related Air Force bases. Along with the Department of Defense and NASA, Colorado’s universities have developed significant aerospace research.

        According to a recent report by the Brookings Institution , Colorado’s space economy employed over 66,000 workers across the military, civil, and private domains, contributing some $8.7 billion in value-added output in 2011 and generating 3.8 percent of Colorado’s private-sector gross domestic product.

        Over 400 consulting, engineering, manufacturing, and supplier companies provide space-related products and services in Colorado, including some of the nation’s major aerospace contractors such as Ball Aerospace, Boeing, ITT Exelis, Lockheed Martin, Northrop Grumman, Raytheon, Sierra Nevada Corporation, and United Launch Alliance. In 2010, NASA awarded contracts totaling more than $1.5 billion to Colorado aerospace companies, earning the state a fourth-place ranking nationally.

        Colorado’s aerospace cluster is a highly innovative one. According to the OEDIT, since 2001, 69 Colorado companies have won technology development and commercialization grants via NASA’s Small Business Innovation Research or/Small Business Technology Transfer program, and over 190 companies have won similar grants from the Department of Defense. Important areas for aircraft innovation include fuel efficiency and 3D printing. 


III.    Bioscience
        Colorado is home to a thriving bioscience industry, which includes the biotechnology, medical device, agricultural-bioscience, diagnostic, pharmaceutical, and health care sectors. Examples of major employers in the state include Medtronic, Covidien, Hach Company, Baxa Corporation, Roche, among others.

        The multiplication of investments in bioscence infrastructure signals the growing importance of this industry to the state’s economy.  Located in Aurora, the recently developed, $5.3 billion Fitzsimons Life Science District aims to become the center of Colorado's bioscience practice and research community. Strategically located near the University of Colorado Anschutz Medical Campus, the district is one of the largest bioscience real estate developments in the nation.

        Similarly, the recently built BioFrontiers Institute, a 300,000 sq. ft., $300 million multi-disciplinary research center, also serves as a catalyst for bioscience innovation. Part of University of Colorado at Boulder’s infrastructure, the Institute specializes in large datasets and genomics, bioimaging, new therapeutic paradigms, and regenerative biology. 

        In addition to state-of-the-art infrastructure, Colorado offers a variety of programs to support bioscience companies. The recently approved House Bill 1283 extended the $25 million Bioscience Discovery Evaluation Grant Program. Recent legislation also determined that 25 percent of the net increase in future corporate income tax withholdings from bioscience businesses should be used to support proof of concept, early stage companies, and infrastructure assistance programs.


IV.    Oil and GasAnnual Colorado Oil Production
            and Price
        Colorado’s oil and gas industries have experienced unprecedented growth over the last few years. The U.S. Energy and Information Agency’s (EIA) 2011 assessment of proved reserves placed the state as number nine for petroleum liquids and number seven for natural gas.  According to a recent study by the University of Colorado’s Leeds School of Business, economic benefits from the state's upstream and midstream oil and natural gas industry totaled $126 billion between 2008 and 2012.

        The state boasts two of the 100 largest U.S. oil fields and proved reserves are increasing. Between 2004 and 2013, nearly 30 thousand wells were drilled with a total of approximately 53 thousand being in current production.

         The increased use of horizontal drilling and hydraulic fracturing technologies has boosted crude oil production breaking a sixty-year record of 64 million barrels in 2013 and contributing $6 billion to the state economy.  According to the U.S. Energy Information Administration, Colorado currently supplies 1 in every 50 barrels of U.S. output.

        Colorado is also an important producer of natural gas. Home to 9 of the country’s 100 largest natural gas fields, the state output has doubled between 2001 and 2013. Approximately three-fourths of households in Colorado use natural gas for home heating.


V.    Information Technology
        According to the TechAmerica Foundation, Colorado’s technology industry employed over 162 thousand people in 2012, or 8.7 of private sector workers. The state ranked 6th in the nation for software publishers, 7th for computer and peripheral equipment manufacturing, and 9th for engineering services.

        With a strong corporate presence, Colorado is home to regional offices of global IT players, such as DISH Network, Liberty Interactive, Liberty Global, Oracle, Clear Channel, Century Link, and SAP. The state also has a vibrant startup community - according to Built in Denver’s 2012 Colorado Digital Startup Report, 122 digital technology startups were launched in 2012, or one startup every 72 hours.

        Boulder-based Tendril is an example of Colorado’s innovative spirit. The company has created an open, cloud-based software platform that provides the infrastructure, analytics, and understanding required to deliver personalized energy services management based on Big Data.  The company just rolled out a new feature of its software that enables it to support all 130 million homes in North America. 


VI.    Marijuana
        In January 2014, Colorado became the first state in the U.S. to allow recreational marijuana sales. In spite of booming demand, a very strict drug war-era tax code often threatens new businesses’ profitability; all the more reason for this emerging industry to rely on innovative technologies that support more efficient operations.

        Innovations range from genetics to growing methods. The use of LED lighting that mimics the sun has been particularly helpful for indoor growing facilities. In addition to consuming less electricity, this technology puts out less heat than traditional grow lamps, which reduces refrigeration needs.

        An ongoing trend among Colorado’s marijuana farmers is moving out of warehouses and into greenhouses. This will require further innovation that provides the necessary light diffusion and the most favorable settings.

        Bioscience research also offers great promise to the marijuana business. University of Colorado at Boulder’s Cannabis Genomic Research Initiative is engaged in sampling DNA from multiple cannabis species. The material will be analyzed, sequenced, and mapped at an unprecedented level of detail.


Innovation Hubs

Denver and Boulder concentrate a significant portion of Colorado’s innovation. These dynamic centers have gained increased economic relevance both at the state and national levels. 


I.    Denver
        Due to its strategic west-central location, Denver is rapidly becoming a hub for federal, high-tech, educational, commercial, financial, cultural, tourist, storage, and distribution activities in the Rocky Mountain States.

        Colorado’s capital is home to various large corporations in Central America, such as Lockheed Martin, CenturyLink, Comcast, United Airlines, DISH Network, IBM, among others. Employment growth in Metro Denver has been consistent and diverse. The region is on target to add 46,000 new jobs in 2014.  Job growth has been particularly strong in natural resources and construction, education and health services, professional and business services, and leisure and hospitality.


Annual Employment Growth Rates
Source: U.S. Bureau of Labor Statistics


2012
2013
2014 (estimated)
Metro Denver
2.9%
3.5%
3.2%
Colorado
2.4%
2.9%
3%
U.S.
1.7%
1.7%
1.8%


        The seven-county Metro Denver area is now home to 3 million people, with the population expanding by about 1.6 percent per year in 2013 and 2014. The millennials are the largest population group in Metro Denver, adding up over 833,000 people in 2014. On track to be the most educated generation in history, they represent a valuable pool of highly skilled labor.

        Denver’s startup environment is particularly dynamic. Recent success stories include ViaWest, a provider of collocation, hosting, cloud computing, and managed services to businesses nationwide. Founded in 2012, the startup owns and operates 22 enterprise-class data center facilities, serving thousands of customers. ViaWest was recently acquired by Canadian telecommunications company Shaw Communications for $1.2 billion.

        Accuvant, a cyber security firm headquartered in Denver with offices in 27 U.S. cities, has also been recently acquired by investment firm Blackstone Group LP for $225 million.  Similarly, video ad platform SpotXchange recently sold a 65 percent stake to European entertainment network RTL Group for $144 million.
 

II.    Boulder
        Boulder’s diverse economy includes industries such as aerospace, bioscience, data storage, light manufacturing, nanotechnology, natural and organic products, photonics, professional and scientific services, renewable energy and energy research, software, and tourism.

        A growing concentration of advanced technology industries in the city has attracted more than $19 million in venture capital investments in the first quarter of 2014.  In 2012, 36 companies located in Boulder raised over $1 million.

        Boulder offers a very supportive environment for innovation and entrepreneurship. Though small in population, the city has extraordinary entrepreneurial activity. The Innovation Center of the Rockies and the University of Colorado’s Technology Transfer Office are examples of institutions working to help early stage companies and to enable the commercialization of innovative technologies.

        Boulder is also home to CO-LABS, a coalition of federally funded scientific laboratories, universities, businesses, local governments, and legislators who work together to establish Colorado as a global leader in research, technology, and technology transfer. The initiative aims at advancing the state’s global competitiveness, by conducting economic analysis, encouraging technology collaboration, and providing education.

        TechStar, a mentorship-driven seed stage investment fund and accelerator program, and Foundry Group, a venture capital firm focused on investing in early-stage information technology companies, are also examples of Boulder-based organizations that contribute to a dynamic economy. 

        Promising Boulder-based startups include Epic Playground, a media analytics company and creator of the mediagauge tool that helps companies measure the use of video across websites; and Gnip, which has developed the innovative Historical PowerTrack that enables developers to search, find, analyze, and compare every Tweet ever written. Gnip has raised $6.6 million from Foundry Group, First Round Capital, SoftTech VC, and others.

        Another example is SendGrid, one of the fastest growing startups in Boulder. Founded in 2009, it has become the world’s largest email infrastructure as a service provider. Its email delivery service moves 2 percent of the world's non-spam email (over 14 billion emails/month) for more than 180,000 companies including technology leaders like Pinterest, Spotify, and Uber. As of 2013, the company had raised more than $27 million in total funding.
   

University Research

        Colorado is home to large research universities that are known for their engineering and applied sciences programs. These institutions have contributed to the creation of a dynamic and innovative economic environment.


I.    University of Colorado at Boulder
        Founded in 1876, CU-Boulder has a total undergraduate enrollment of over 25 thousand. It is the only school in the Rocky Mountain Region to make it into the Association of American Universities, an elite group of 62 research universities. Under its Flagship 2030 strategic plan, CU-Boulder has established five research initiatives , namely:

a)   Aerospace Ventures, which combines cutting-edge aerospace engineering and science research to enable
       innovations such as the development of unmanned aircraft systems for challenging environments,
       innovative small satellite systems for observing Earth, and new sensors for Earth and space environments.

b)   The BioFrontiers Institute, which focuses on transforming scientific discoveries into real-world
       applications that improve human health and well-being, particularly in areas such as large datasets and
       genomics, bioimaging, new therapeutic paradigms, and regenerative biology.

c)   The Computational Sciences and Engineering Initiative, which applies computing power, algorithm speed
       and reliability, and complex visualization software tools to fields such as aerospace, manufacturing and
       engineering design; bioinformatics and biology; material sciences; renewable energy; computational
       chemistry and molecular dynamics; and fusion energy science.

d)   The Energy Initiative, which comprehends various research efforts ranging from energy-efficient
       construction to energy storage, from solar and wind energy to hydrogen production.

e)   The Geosciences Initiative, which combines natural sciences with social sciences, humanities, and
        business research, focusing on environmental sustainability.


        With a long history of partnering both with the government and the private sector, CU-Boulder is dedicated to helping businesses generate new products and technologies. Recent examples include a new dental restorative material, based on technology developed by a team of CU-Boulder engineers, which was unveiled by the 3M Company on October 1, 2014; and NASA’s $671 million MAVEN mission to Mars, to which the university has provided the project lead, science operations, two of the science instruments, and leading education and public outreach.


II.    Colorado State University
        Located in Fort Collins, CSU is among the nation’s leading research universities. With world-class initiatives in infectious disease, atmospheric science, clean energy technologies, environmental science, and biomedical technology the university attracted more than $300 million in research funding in FY ‘13.

        CSU’s Infectious Disease Research Center (IDRC) performs cutting-edge research on infectious diseases that impact humans, animals and food supply. It is home to a state of the art biocontainment facility that is 1 of 13 NIH funded Regional Biocontainment Labs (RBL) in the country. The university’s Biopharmaceutical Manufacturing and Academic Resource Center has recently been awarded a $2 million Department of Defense contract for working on an Ebola vaccine.

        The university’s Flint Animal Cancer Center (ACC) is the largest of its kind in the world. It has worked on the prevention, diagnosis, and treatment of cancer in pet animals.  Through a new model of public-private partnering, CSU has established a cancer research supercluster focused on developing product-driven strategies within the academic research community and  advancing emerging products by partnering with private and public sector organizations.

        The university is also engaged in world-class research for the creation and dissemination of market-driven clean energy solutions. CSU’s clean energy research supercluster has been responsible for the establishment of various innovative companies, such as Solix BioSystems, Inc., the creator of a robust algal growth system (AGS®) that is based on its proprietary extended-surface area photobioreactor panels.

        Dedicated to bringing CSU’s innovations and technologies into the marketplace, CSU Ventures has enabled the disclosure of more than 550 inventions and the filling of 710 patent applications, 56 of which were issued. It also contributed to the creation of 21 new startup companies and to the generation of $7.12 million in licensing income over the last five years.


III.    University of Denver
        The oldest independent university in the Rocky Mountain Region, DU is also among the country’s premier private universities.

        Among its several research efforts is an interdisciplinary science, technology, engineering, and mathematics (STEM) program. The university is currently building a new 110,000-square-foot building and plans to expand its engineering and computer science student and faculty capacity by 30 percent.

        STEM research has focused on cyber security , software engineering, sustainable energy distribution and mechatronics. The Knoebel Center focuses on STEM aspects of aging-related subjects, such as the development of orthopedic biomechanics, including the refinement of artificial limbs, valves, and prosthetics.


Conclusion

        With an increasingly dynamic and diversified economy, Colorado has attracted a growing number of companies as well as highly qualified workers. Innovation is at the heart of recent positive developments, such as the blooming of aerospace, advanced manufacturing, and IT industries. Colorado-based companies should take advantage of federal and state R&D tax credits to support their innovative efforts.

Article Citation List

   


Authors

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

Andrea Albanese is a Project Manager with R&D Tax Savers.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.


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