R&D Tax Credit Aspects of Cyber Security and Homeland Protection



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        President Obama has identified cybersecurity as not only one of the most serious economic and national security challenges we face as a nation, but also one that we as a government or as a country are not adequately prepared to counter. Shortly after taking office, the President therefore ordered a thorough review of federal efforts to defend the U.S. information and communications infrastructure and the development of a comprehensive approach to securing America's digital infrastructure.

        The expanding vulnerability of the Internet we all increasingly rely on for virtually every aspect of day to day living is apparent to all regular web users. Cyber attack exposure to the U.S. homeland electric grids, military bases, defense contractors, transportation networks and critical infrastructure is of major concern. Due to our increasing reliance on the internet, the homeland cannot and will not tolerate cyber attacks. The necessary security enhancements will require crucial private sector innovation that will be potentially eligible for R & D tax credits.


The Research & Development Tax Credit

        Many of the private industry and industry supported University R & D efforts will be eligible for Federal Research and Development tax credits. 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 January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.


Wide Range of Private Solutions Required

        According to the high tech research firm Gartner, the global market for cyber security will total $65.7 billion in 2013 and climb to $85 billion by 2016 for a compound annual growth rate of 9% . As threats increase, a wide range of industries are investing more in cyber security including financial services, utilities, defense industries, energy companies, and media companies.

        The scope of the challenge is so great that it will require of the resources of large companies with security expertise such as IBM, Symantec, Cisco, McAfee, Raytheon, BAE Systems, and Northrop Grumman. This is a very fragmented market with the top four players only comprising 30% of the product offerings.

        Numerous small companies with a cyber security R&D focus are developing throughout the country. This development is taking place namely in Silicon Valley (due to long standing software engineering expertise), Silicon Alley in New York City (to service the financial services industry), Virginia (for its proximity to various federal government headquarters), and Boston (because of the supply of cyber entrepreneurs and software engineers).


Mobile Virus Trends

        As we have seen with industrial control devices, PCs, and notebook computers, virus attacks are expected to advance to mobile devices. Websense, a technology security firm, says they have found evidence that the "black hole" software which now infects PCs, is specifically targeting Apple iPhone and Google Android smartphones.

        Continued improvements to smartphone technology, in addition to advancements in software, greatly decrease the threat of mobile phone viruses and simultaneously qualifies for R&D tax credits.


Focus on Computer Attacks from China

        Over the past few years, the US has seen an increased number of computer attacks from China, including this year's New York Times hack and Google and Intel's 2010 hacks. These internet invasions target many different users with private information to protect, including large companies, government agencies, law firms, news organizations, universities, and tech startups.

        In a recent secret intelligence assessment, the United States was found to be the target of "a massive and prolonged computer espionage campaign from China that threatens the U.S. economy." The report also describes the different sectors being focused which include the energy, finance, information technology, aerospace, and automotives sectors.


U.S. Government Offensive Cyber Security Initiatives

        The US Government announced on March 12, 2013 that for the first time, it will take offensive measures as opposed to a historic defensive only approach to cyber security attacks. General Keith Alexander, head of the new Cyber Command, is forming teams of computer programmers and experts capable of offensive cyber attacks on foreign nations in the event of a major U.S. network attack. The public announcement of cyber weapon development for wartime use is a first for the Obama administration.

        Alexander makes it clear that "this defend-the-nation team, is not a defensive team". Initiatives include adding 40 cyber teams, 13 of which will be dedicated to offense and ramping employees up from 900 to 4,000. Alexander also notes the best defense relies on being able to monitor incoming traffic to the U.S. through internet service providers (ISPs). Developing such a defense system would allow these private ISPs to quickly alert the government about potential cyber attacks.


Conclusion

        America's high tech software engineers create the internet infrastructure that creates the existing connected world we live in. This same brain trust is now called upon to develop the new products and firewalls that will enable us to safely and securely rely on this empowering technology. R&D tax credits can support these critical activities.

Article Citation List

   


Authors

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

Raymond Kumar is a CPA and Tax Manager with R&D Tax Savers.

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


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