The R&D Tax Credit Aspects of Impact Investing
Impact-Investing
Over the last two years, there has been a
growing interest by both large and specialist investment firms
in impact investing. Impact investing refers to the practice
of investing in mission-driven companies with the goal of
generating advantageous and/or environmental outcomes in
addition to financial return.
Impact investing is
attractive to a broad range of investors including
environmentalists, millennials, not-for-profits, foundations,
family wealth managers, and everyone interested in an improved
society. There are an estimated 800 impact funds focused on
everything from education and infrastructure to healthcare and
microfinance. As investment funding increases for this asset
class, investment managers have the opportunity to make sure
that the companies selected for investing are utilizing
federal and state R&D tax credits which will enhance their
economic return.
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 December 19, 2014 President Obama signed the
bill extending the R&D Tax Credit for the 2014 tax
year. At the time of publication, proposed tax extender
legislation will likely extend the tax credit through December
31, 2016.
Selecting Impact
Investments
The underwriting criteria for selecting
eligible investments can be wide ranging depending on the
philosophy of the funds’ creator. For example, Howard
Warren Buffet, the grandson of Warren Buffet, has created a
new fund focused on investments in:
- Clean energy
- Water
- Sustainable farming
All three of these
sectors include both startups with new concepts and well
established, large capitalization companies. Moreover,
all three sectors overlap. Some clean energy concepts
use less water and reduced water usage is a core tenant
of sustainable farming.
Clean Energy
To support the potential of alternative
energy such as wind and solar, large technology improvements
are needed in energy storage and battery storage. The
definition of clean energy can be controversial. Natural
gas is a major clean energy category for many people, however,
not a non-qualifying category for some environmentalists,
particularly when fracking is involved.
As this article went to
press, Bill Gates announced the creation of a multibillion
dollar investment fund, called the Breakthrough Energy
Coalition , designed to increase R&D funding for clean
energy. The fund is expected to be one of the largest clean
energy funding in history. Other investors include Jeff
Bezos of Amazon, Mark Zuckerberg of Facebook, Jack Ma of
Alibaba, Richard Branson of Virgin Group, Ray Dalio of the
Bridgewater Hedgefund, and Mukesh Ambani of India’s Reliance
Industries.
Our firm’s published
articles on R&D tax credits for clean energy initiatives
include the following:
One of the best ways to
achieve this energy reduction in buildings is with highly
energy efficient HVAC technology including combined heat and
power (CHP), geothermal, and energy recovery ventilation
(ERV). There are a finite number of companies that manufacture
this specialized equipment.
Water
Water conservation is particularly critical
in the western part of the United States. Major areas for
technology improvements include desalinization technology,
irrigation systems and filter technology.
Our firm’s water related published R&D articles include
the following:
Sustainable Farming
In this category, major technology
developments are occurring in the smart or precision farming
areas and in a wide range of indoor farming and fish farming
activities.
Our firm’s R&D tax credit articles in the sustainable
farming area include the following:
Conclusion
Impact investing is by definition more
purposeful investing. Informed investment managers need to
understand the developing technologies and make certain their
clients’ financial results are enhanced by federal and state
R&D tax credits.
