R&D Tax Credit Aspects of Indiana Innovation



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Indiana-Innovation

    Indiana is pro-business state with a diversified business base that is committed to innovation. Major innovating business sectors in Indiana include logistics, pharmaceutical, medical devices, food processing, and smart farming.

    Federal and Indiana R&D tax credits are available to support Indiana innovation efforts.



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. A similar extension is expected for 2014.



Indiana R&D

        As a further incentive for innovation, Indiana also has a complimentary state R&D tax credit. The Indiana R&D tax credit provides an incentive for business investment in Indiana by providing a credit against state tax liability for qualified company research expenses. The R&D tax credit is based on the increase in Indiana R&D over the prior three-year base.

    The R&D tax credit is authorized by IC 6-3.1-4-1 and is administered by the Indiana Department of Revenue.



Indiana's Population Growth

    In May 2014, a U.S. Census Bureau report was analyzed by the Indiana Business Research Center at Indiana University's Kelley School of Business. It indicated that Indiana's four largest cities: Indianapolis, Fort Wayne, Evansville and South Bend, are experiencing tremendous population increases. Between 2010 and 2013, the increases were significantly larger than seen in previous years.

    Between 2010 to 2013, Indianapolis increased by an average of 7,228 residents per year. This brought them to an approximate total population of about 843,400 . Indianapolis was the nation's 12th largest city in 2013. After seeing almost ten years of flat population change, Fort Wayne has grown to roughly 864 people per year. It now contains around 256,500 people. From 2010 to 2013, Evansville has grown by about 82 residents per year which is significant compared to its previous average annual decline of 418 residents from 2000-2010. Similarly, it is notable that although South Bend lost approximately 44 people per year over the last few years, when compared to its previous 700 annually from 2000-2010 one could see that its population has substantially increased. Additionally, 15 out of 20 of Indiana's largest cities have had a population increase over the past three years. It's not difficult to see why Indiana ranked as the 30th fastest-growing state in 2013 with a population increase of 0.51 percent, up from 0.33 percent in 2012.

    The table below demonstrates Indiana's population growth from 1910 and shows projected growth through 2030:


Population



Logistics: Software and Robots

    Indiana is a national center for distribution centers and logistics. The world's largest consumer book publisher, Penguin Random House LLC, plans to consolidate a majority of its U.S. distribution operations in Crawfordsville, Indiana. The project will increase the facility from approximately 650,000 square feet to 1 million square feet .This will create up to 313 jobs by 2016. "The Indiana Economic Development Corporation offered Penguin Random House up to $700,000 in conditional tax credits and up to $100,000 in training grants based on the company's job-creation plans. The city of Crawfordsville approved additional incentives."

    As a result of the recent favorable resolution of a large Federal Express logistics internal software related tax claim, Fed Ex Corp. v. United States, No. 08 - 2423 2009 WL 2032905 ( W.D. TN June 9, 2009) , it is clear that qualifying logistics related software projects may be eligible for R & D tax credits. In addition, many warehouses are integrating a variety of robots including Kiva warehouse picking robots and Baxter packing robots.



Bioscience

    Indiana's bioscience industry is large and specialized. Indiana is highly specialized in three subsectors: agricultural feedstock and chemicals, medical devices, and drugs and pharmaceuticals. Agricultural biosciences and medical devices have increased employment since 2007 along with research, testing, and medical labs. According to the BIO/Battelle State Bioscience Jobs, Investment, and Innovation 2014 report released at the BIO International Convention in San Diego, CA "The Indianapolis/ Carmel metropolitan area was the only region in the nation to have a specialized employment concentration in all five bioscience industry subsectors." Indiana's research universities and colleges combine to conduct nearly $578 million in bioscience-related R&D. The table below illustrates Indiana's performance in selected bioscience-related metrics:

Bioscience


The table below shows the comparison between Indiana and the United States within 6 industry subsectors. It shows the establishments and average annual wage and how it compares in 2012 to the 2007-2012 change. Also in the same time period, it compares employment which includes location quotient, direct-effect employment multiplier, and total employment impact:

Indiana Vs. US



BioCrossroads

    BioCrossroads strives to advance Indiana to the next generation of growth and innovation. They serve as a vehicle for the continued growth of Indiana's life sciences industry by creating an environment that provides more economic opportunity. BioCrossroads helps provide funding, launch new business products, and partner with Indiana's state research institutions, global companies, philanthropic organizations and government. They promote science education and build awareness through marketing for Indiana's life sciences industry. BioCrossroads provides money and support to life sciences businesses and expands partnerships among Indiana's life sciences institutions. They also produce improved healthcare for Indiana communities. All these efforts create a flourishing industrial network for Indiana's growth and innovation.



Food Processing

    Indiana's food and agricultural sector is a $16 billion industry. Food and agricultural innovation today is very diverse. It includes biotechnology, plant science , bioinformatics, information technologies, food science and food safety systems, animal health and nutrition, cropping systems, and satellite technologies, among many others. Indiana Lieutenant Governor Sue Ellspermann stated: "The agriculture and food production/processing industry is a vital part of the Indiana economy, employing nearly 20 percent of the Hoosier workforce and generating over $25 billion in direct economic impact. Within that industry a significant amount of world-class agricultural research and development is occurring in labs and workshops at companies and universities throughout the state."

    BioCrossroads announced the organization of a Food and Agriculture Innovation Initiative; a need identified in the 2012 report "Food and Agricultural Innovation - 21st Century Opportunities for Indiana." The report outlines Indiana's assets and capabilities in food and agricultural innovation. It expands on Indiana's opportunity for continual growth and economic advancement. The report pinpoints Indiana's strong assets and capabilities in the areas of food and agricultural innovation. It also focuses on the level of collaboration among crucial participants which makes a strong case for Indiana's opportunities for continued growth. The report also recommends a new organizing forum that could best define opportunities for sustained growth, ultimately leading to greater economic development across the state and for individual stakeholders.



Medical Devices

    Indiana is currently the national leader in medical device manufacturing. It's medical device industry generates more than $10 billion in revenue annually. Indiana lawmakers are examining the ways that the state can assist and partner in the continued growth and success of Indiana's medical device industry. State policies, laws, and regulations can positively affect the continued growth and innovation of an industry that saves lives and produces quality jobs.

    Legislative leaders have asked the Interim Study Committee on Commerce and Economic Development to consider expanding the partnership between state government and more than 300 companies across Indiana that specialize in the innovation and manufacturing of medical devices. Indiana State Representative, Terri J. Austin, states: "Even though Indiana is a national leader in medical device manufacturing, I believe it is prudent for us to review the impact of our state's laws and regulations on the industry's continued innovation and growth. That is where this study committee will play a key role." Austin also said the committee's areas of study would be tax assistance in such areas as research and development. She believes that it is vital to continue to engage in continued development in medical device manufacturing as that medical device companies add to the economic health of Indiana.



Indiana Medical Device Manufacturers Council (IMDMC)

    The Indiana Medical Device Manufacturers Council (IMDMC) is an association for medical device manufacturers. Combined with other companies, it promotes the education and interests of medical manufacturers in Indiana and Washington D.C. Their focus is on delivering innovative, life-changing technologies to their patients. IMDMC brings together large and small medical device manufacturers to strengthen communication and express the interests of these innovative companies before state and federal legislatures and regulatory agencies.



Purdue Research Park Economic Development

    David Ross and Josiah K. Lilly helped Purdue University make its research and development more accessible to the industry. New industries and new departments from existing industries grew out of Purdue research. the nearly $1 billion Purdue Research Foundation manages and licenses Purdue's intellectual property, accepts gifts, administers trusts, acquires property and performs other services helpful to the University . The park network has four locations. It has 236 companies with more than 4,200 jobs. With more than half a million square feet dedicated to incubation, it is the largest university-affiliated incubation park complex in the country.

    The Purdue Research Foundation engaged Thomas P. Miller and Associates to conduct an independent study of the economic impact of the Park across the State of Indiana. In their findings, they concluded, that combined, the Park is a top 20 employer in the State. There was a $256 million investment in the Park facilities and infrastructure from 1999-2000. They found that the economic impact for the State of Indiana was $1.3 billion. Also, $48 million was contributed to State and local taxes. Since 1987, $49 million was brought to Indiana in federal research and development grants for small businesses. They stated that high-tech, high quality jobs pay an average annual salary of $63,000, which is 65 percent higher than the Indiana average. Therefore, as a result of the Park, Purdue is viewed as a major player in commercialization and economic development in Indiana.



Indiana University Partners with Eli Lilly and Company

    The School of Science at Indiana University-Purdue University Indianapolis and the Indiana University School of Medicine have announced their collaboration with Eli Lilly and Company for the Lilly Graduate Research Advanced Degrees program (LGRAD). The program is designed for Lilly Research Labs employees based in Indianapolis. The goal of the program is to help Lilly employees obtain advanced degrees in a graduate program from the School of Medicine or School of Science. This would strengthen graduate student research in the area of biomedical sciences and would foster collaborative relationships that result in strong publishable thesis work. This competitive program provides a flexible framework for Lilly employees to fully satisfy normal requirements for graduate study while maintaining their employment. Meanwhile, tuition will be covered by Lilly. LGRAD students will also have the opportunity to be mentored by an advisor from the School of Science or the School of Medicine and a sponsor from Lilly Research Laboratories.



Conclusion

    Indiana is a strong business state with an exciting level of innovation. Research & Development is the key to Indiana's continuing economic growth. Taxpayers should be aware of Federal and State tax incentives which are available to them to help shoulder the costs of innovation.


Article Citation List

   


Authors

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

Jennifer Reardon is a Project Coordinator with R&D Tax Savers.

Charles G Goulding is the Manager of R&D Tax Savers.


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