The R&D Tax Credit Aspects of Impact Investing



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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:

  1. Clean energy
  2. Water
  3. 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.

Article Citation List

   


Authors

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

Robert Goulding is a CFA and Investment Professional with R&D Tax Savers