The R&D Tax Credit Aspects of Colorado Innovation
Colorado
Colorado has become a
center of growth and innovation within the United
States. Over the past five years, Colorado’s economic
growth rate ranks fourth in the nation according to U.S.
News. The state’s standout sectors include cannabis,
manufacturing, aerospace, craft beer & wine, and
technology & startups.
This article discusses
some of Colorado’s most innovative industries/firms and the
attendant R&D tax credit opportunities.
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.
Colorado State
Tax Incentives
The state of Colorado
also offers a research and development income tax credit for
companies located in designated locations, known as
enterprise zones (EZs). 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.
Colorado’s Main
Industries
The following sections
provide an overview of Colorado’s most innovative
industries:
Cannabis
Colorado continues to
dominate the national cannabis1
landscape. The state set sales records in both 2019
and 2020, despite the pandemic. Sales now exceed a
whopping $2 billion.
Sector innovation ranges
from genetics to growing methods. The use of LED
lighting2 that mimics the
sun has been particularly helpful for indoor growing
facilities. In addition to consuming less electricity,
this technology produces less heat than traditional grow
lamps, reducing refrigeration3
needs.
Another trend among
Colorado’s marijuana farmers is moving out of warehouses and
into greenhouses. This requires process innovation4 to provide the necessary
light diffusion and the most favorable grow settings.
Bioscience research also
offers great promise to the marijuana business. For
example, the University of Colorado at Boulder’s Cannabis
Genomic Research Initiative is engaged in sampling DNA5 from multiple cannabis
species.
Since patchwork marijuana
laws (and taxes) can affect profitability, firms have a
strong incentive to innovative efficient operations and to
take advantage of R&D tax opportunities.
Advanced Manufacturing
Colorado is at the
forefront of advanced manufacturing’s U.S. resurgence6. The state’s most
innovative firms use advanced processes to serve diverse
sectors, from electronics and consumer products to clean
energy7 systems, aerospace
vehicles, and medical devices8.
The industry is
geographically distributed, with over 5,900 manufacturing
firms, more than 120,000 employees, and $16.3 billion in
annual economic output across Colorado.
The state is home to more
than 300 manufacturers and distributors9
of electronics products, components, and services.
Headquartered in Inverness, Arrow Electronics is a Fortune
500 firm and Colorado’s largest revenue-generating company.
The Colorado Robotics
Association comprises nearly 30 companies that offer highly
innovative automation solutions10.
Two examples are About Packaging Robotics, the
Thornton-based manufacturer of robotic package handling
systems, and Carbide Robotics, the Denver-based startup
which creates advanced spherical robots for the assessment
of dangerous situations.
Especially when deployed
as a manufacturing process improvement, the adoption of
robotics creates major R&D tax credit opportunities.
Aerospace
Colorado’s thriving
private sector aerospace sector is second in the nation in
employment. That achievement is partly due to four
in-state military commands (Air Force Space Command, Army
Space Command, NORAD, and USNORTHCOMM) and three
space-related Air Force bases. These bases, along with
NASA and Colorado’s university system, have generated
significant aerospace research.
Over 400 consulting,
engineering, manufacturing, and supplier companies provide
aerospace-related products and services in Colorado,
including major contractors Ball Aerospace, Boeing11, ITT Exelis, Lockheed
Martin12, Northrop
Grumman, Raytheon13,
Sierra Nevada Corporation, and United Launch Alliance.
Even so, an estimated 84%
of state aerospace firms are small businesses and startups
that may be less familiar with R&D tax credit
opportunities. Important areas of innovation include
fuel efficiency and 3D printing.
Bioscience
Colorado is also home to
a thriving bioscience industry, which includes the
biotechnology, medical device, agricultural-bioscience,
diagnostic14,
pharmaceutical, and health care sectors. Examples of
major employers in the state include Medtronic15, Covidien, Hach
Company, Baxa Corporation, Roche, Clovis Oncology, ArcherDX
(diagnostics), and Tolmar Pharmaceuticals.
Some Colorado firms
operate within bioscience innovation communities.
Located in Aurora and resting on 125 acres of land, the $5.3
billion Fitzsimmons Life Science District is one such
example. Similarly, the BioFrontiers Institute, a
300,000-square-foot, $300 million multi-disciplinary
research center, serves as a catalyst for bioscience
innovation, specializing in genomics16,
bioimaging, new therapeutic paradigms, and regenerative
biology17.
Craft Beer & Wine
Examples of microbrewery
innovation include process efficiency, refinement, and waste
reduction. Many craft beer18
makers also use sophisticated data management to further
refine their processes.
Colorado’s breweries
include Avery, Renegade, New Belgium, Strange Brewing, and
Dry Dock. Denver’s eight breweries make it Colorado’s
beer epicenter and a national leader: According to a recent
CNN report, Denver ranks fourth in craft beer cities in the
United States.
Colorado’s beverage scene
also includes a growing list of wineries. Like
microbreweries, wineries19
innovate through process refinement. For example, some
western U.S. wineries use techniques to eliminate smoke
taint, and others deploy automated grape punch-down
technologies to enhance productivity.
In-state wineries include
Two Rivers Winery and Chateau in Grand Junction and
Bookcliff Vineyards in Boulder.
Technology &
Startups
Colorado’s burgeoning
startup20 scene began to
accelerate in the mid-2000s. The state then reached a
tipping point in 2010 that established Colorado as a
national startup focal point. Today, Colorado’s
“techiest” cities include Denver, Boulder, Fort Collins, and
Colorado Springs.
Today, tech giants
Google, Facebook, and Salesforce all have opened offices
in-state, as have upstarts Gusto and Robinhood. In
another notable development, Palantir Technologies, the data
analytics company, moved its headquarters from San Francisco
to Denver in 2020.
One new firm, Hyperia,
produces speech recognition software that transcribes
business meetings. Another, Boulder AI, makes smart
cameras connected to deep learning that provides real-time
traffic and other data to customers.21
Other home-grown tech startups, including SendGrid, an email
delivery service recently acquired by Twilio for $3
billion. Boulder-based Uplight is another example; the
company has created an open, cloud-based software platform for
personalized energy services management based on big data.22
University
Research
In addition to private
sector innovation, Colorado is home to leading research
universities23 that are
known for their engineering and applied sciences
programs. These institutions have contributed to the
creation of a dynamic economic environment and serve as
their own innovation hubs.
University
of Colorado Boulder
Founded in 1876,
CU-Boulder is the only university in the Rocky Mountain
Region to be part of the Association of American
Universities, an elite group of 62 research schools.
CU-Boulder is dedicated
to helping businesses generate new products and
technologies. Examples include a dental restorative
material unveiled by 3M; and NASA’s $671 million MAVEN
mission to Mars, for which the university served as project
lead.
Under its Flagship 2030
strategic plan, CU-Boulder has established five research
initiatives, namely:
-
Aerospace Ventures,
which combines cutting-edge aerospace engineering and
science research;
-
The BioFrontiers
Institute, which transforms scientific discoveries into
real-world health applications;
-
The Computational
Sciences and Engineering Initiative, focusing on
aerospace, manufacturing and engineering design;
bioinformatics and biology; material sciences; renewable
energy; computational chemistry, molecular dynamics; and
fusion energy science;
-
The Energy
Initiative, focusing on energy efficiency, energy
storage, and clean tech;
-
The Geosciences
Initiative, focusing on environmental sustainability.
Colorado State
University
Located in Fort Collins, CSU is a leading
research university, with world-class initiatives in
infectious disease, atmospheric science, clean energy
technologies, environmental science, and biomedical
technology.
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 proprietary extended-surface
area photobioreactor panels.
Dedicated to bringing
CSU’s innovations and technologies into the marketplace, CSU
Ventures has generated more than 550 inventions and the
filing of 710 patent applications.
University of Denver
The oldest independent university in the
Rocky Mountain Region, DU is a premier private
university. The university recently completed a new
110,000-square-foot STEM building and plans to expand its
engineering and computer science student and faculty capacity
by 30 percent.
DU’s STEM research has
focused on cyber security, software engineering, sustainable
energy distribution and mechatronics24.
The Knoebel Center focuses on STEM aspects of
aging-related subjects, such as the development of orthopedic
biomechanics.
Conclusion
With an increasingly
dynamic and diversified economy, Colorado is home to a
growing number of established firms, innovative startups,
and highly qualified workers. R&D is at the heart
of these developments. Colorado-based companies should
take advantage of federal and state R&D tax credits to
support their innovative efforts.
