The R&D Tax Credit Aspects of Iowa



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Iowa
        The Iowa economy is an innovative one.  The Hawkeye state has a robust manufacturing sector, a constantly evolving automotive manufacturing industry and an enormous food processing community.  All of these industries have one thing in common – a commitment to innovation.

        In the manufacturing sector, companies like Affordable Buckets in Victor, Iowa develop new bucket products and integrate process improvements in order to minimize costs and produce buckets faster.  In the automotive sector, aftermarket parts manufacturers like JB Autosports Inc., in Pleasant Hill forge and stamp new products to meet a rising demand in the automotive market.   In the food processing industry, companies like Iowa Best Beef Brand in Postville, compete on nutritional value, taste, shelf life and cost of production.  

        When companies such as these develop new products and undergo process improvements, they may be eligible for Research and Development tax credits which are available to stimulate innovation.   


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 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum Tax and startup businesses can utilize the credit against $250,000 per year in payroll taxes.


Iowa Research & Development Credit

        Iowa sets itself apart from the rest of the nation, being one of only a few states in the U.S. to offer a refundable research activities credit.  Iowa companies earn refundable tax credits for research and development investments that may be paid directly in cash to the company once its tax liabilities have been met.  Specifically, the qualified research expenditures include:

  • Wages paid to an employee for performing or supporting a research activity conducted at an Iowa facility or for an employee in Iowa who directly supervises or directly supports research activities
  • Supplies including tangible property other than land, improvements to land and depreciable property
  • 65 percent of expenses related to contract research

Iowa’s Economic Atmosphere

        Iowa is great place for companies to grow their business.  It consistently ranks among the nations lowest in cost of doing business.  Manufactures in particular are attracted to the State for its competitive business environment.  From 2005 to 2015, Iowa manufacturing exports have grown 78%; and with more than $774 million annually invested in the university research, Iowa spends $249 per citizen on R&D at the academic level.  The Iowa landscape is diverse and robust.  In addition to agriculture and manufacturing, it is also well known for bioscience, food processing, aerospace and professional services.  



Advanced Manufacturing

        Iowa is a manufacturing state as much as it is an agricultural state. The $31.7 billion advanced manufacturing industry is the state's largest single business sector. Manufacturing represents 18.8% of Iowa’s total GDP.  Iowa consistently ranks among the top quartile for percentage of GDP from manufacturing.  In 2015, they ranked 8th. That same year, the State exported $13.1 billion worth of manufactured and value-added goods.  Those goods included tractors, insecticides, bulldozers and tractor parts.   Almost 4,000 manufacturers employ over 210,000 Iowans.  

        Innovation is the cornerstone to any successful manufacturing company.   78 percent of all Iowa patents impact advanced manufacturing.  Industrial metal processing, automation precision machinery, environment control systems, digital and electronic devices and power generation equipment are key contributing manufacturing related industries. Other key industries that the advanced manufacturing industry serves include aerospace and defense, industrial chemicals, construction components, commercial/industrial motor vehicles, food and food ingredients, printing and packaging, as well as medical drugs and devices.  

        Examples of companies related to the manufacturing industry and their innovative activities are described below.

        Dickten Masch Plastics, LLC: Dickten Masch Plastics, located in Ankeny, Iowa is a full service plastics molding company that provides high-quality tooling, engineering and design services.  Their scientific molding approach enables maximum control of the most efficient process for any application. Meanwhile, electronic data interchange (EDI) capability keeps customers in close contact with their products’ progress at all times.

        Katecho Inc.: Des Moines, Iowa-based Katecho is an internationally recognized, full service original equipment manufacturer specializing in medical and cosmetic devices.  They provide everything from small volume, hand-assembled products to highly automated computer-controlled fabrication.

        3D Systems: 3D Systems Corp in Pella provides comprehensive 3D products and services, including 3D printers, print materials, on-demand parts services and digital design tools.  Its ecosystem supports advanced applications from the product design shop to the factory floor to medical operating rooms.  


Automotive

        The automotive industry is the anchor of Iowa’s economy.  According to the Center for Automotive Research, the industry employs 79,000 Iowans.  There are 11,200 direct and indirect jobs in the state for automakers and 18,900 direct and indirect jobs for motor vehicle dealers.  Access to innovative research facilities such as the National Advanced Driving Simulator (NADS) at the University of Iowa is a key advantage to automotive companies looking to locate in Iowa. The NADS facility is home to a range of simulators that offer carrying levels of driving realism. Development and research conducted at the NADS – sponsored by government, military, and industry partners – saves lives, improves quality of life for motorists, advances the state fo the art in driving simulation improves the efficiency and productivity of the vehicle manufacturing sector.  

        Many Iowa companies that supply parts for the automotive industry also supply parts for other compatible markets, such as heavy agricultural and construction equipment. Some of these companies and their efforts are described below.

        Oskaloosa Engineering & Manufacturing: This company is a precision machine shop that specializes in the machining of gray iron, ductile iron, steel bar stock, steel forgings, aluminum, bronze and many other ferrous and non-ferrous metals.

        JC Dubil Race Car Parts: Located in Bettendorf, this company specializes in manufacturing and selling parts for circle track applications.

        Axtell Sales Inc.: Axtell Sales, located in Des Moines, this company designs and manufactures innovative car, race car and motorcycle pars. In fact, they have over 50 years experience producing high quality cylinders and pistons for Harley Davidson.


Food Processing

        The food processing industry in Iowa is thriving.  Over 900 Iowa food processors generate more than $35 billion worth of food products annually.  The State is home to 36 of the largest 100 food manufacturers/processors in the country.  It is number one in the nation in corn, soybean, pork and egg production. 20 percent of Iowa’s manufacturing GDP comes from the food processing industry. In 2013, Iowa’s food industry invested over $997 million in capital investment to expand operations.

        Iowa is a state leading breakthroughs in food security due to significant research advancements at Iowa State University and the University of Northern Iowa; through Iowa-based research and development operations of global leaders in seed production within DuPont Pioneer, Monsanto and other companies; through the state’s significant presence at USDA facilities; and lastly, through the leadership of the World Food Prize in food security issues. Each of these global leaders in its own field are based in Iowa, working together to both feed and fuel a world doubling its population amid diminishing resources. Smaller organizations, as highlighted below, are also contributing through innovation.  

        Iowa Premium: Iowa Premium is a beef processing company in Tama.  Their newly renovated 200,000-square-foot state-of-the-art facility meets the highest standards for food safety, quality assurance and sustainability. At the facility, technologies have been incorporated to protect the State’s natural resources and minimize the company’s environmental impact.

        Kemin Industries: Based out of Des Moines, Kemin Industries is a nutritional ingredient manufacturer.  Their lines of products include natural and synthetic agricultural additives for the feed industry, food and beverage additives for the human consumables industry, nutraceuticals, as well as supplements and personal care additives.


Biosciences

        Iowa’s biosciences industry is robust.  Since 2001, Iowa’s growth in 3 of the 4 bioscience subsectors far outpaced the overall nation’s growth rates. These subsectors include AG Feedstock and chemicals, Drug and pharmaceuticals and Research, Testing and medical laboratories. In fact, during the past decade, overall industry growth in Iowa surpassed the national average by 64.5 percent.  Since 2008, the number of Iowan bioscience companies expanded by more than 350 percent.  This industry growth rate may be a product of significant R&D spending. After all, bioscience R&D expenditures in Iowa are 12 percent higher than the national average. Today, Iowa is home to roughly 525 bioscience entities and nearly 7 percent of the industry’s total U.S. workforce  regarding agricultural feedstock and chemical manufacturing.
 
        Iowa provides an ideal environment for the biosciences industry.  The State contains more of the crops used in biofuel production, biomedicines and biodegradables than any other state.  Moreover, they are home to three public universities (the University of Iowa, Iowa State University and the University of Northern Iowa) that make research, science and innovation an important part of their mission.  Together, these three universities leverage over $600 million in cumulative grants, contracts and cooperative research on an annual basis.   Local companies partner with these universities to develop bio-science innovations.  Two regional Iowa companies are listed below.


        Newlink Genetics: Newlink Genetics located in the City of Ames is a biopharmaceutical company focused on discovering, developing, and commercializing novel immuno-oncology products to improve the lives of patients with cancer.

        Emmyon Metabolic Health: Emmyon Metabolic Health in Coralville is a biotechnology company that discovers and develops natural and pharmaceutical compounds that improve muscle mass, strength, exercise capacity, and metabolism.


Aerospace

        Aerospace is another pillar industry in Iowa. There are a total of 40 aerospace and defense industry companies in the State.  Some of those companies are illustrated below.

        Angel Aircraft Corp.: Angel Aircraft, based out of Orange City, designs and manufactures “The Angel” aircraft, a graceful sleek pusher aircraft with fully retractable landing gear and seating for eight.  The plane offers comfort and ease of handling plus a high load capacity, while providing the peace of mind of a twin-engine, STOL-capable airplane.

        MidAmerican Aerospace Ltd.: MidAmerican Aerospace in Cedar Rapids, Iowa designs and engineers aircrafts, engines and components. The company invests enormous resources into identifying the key rotable components that need to be in stock ready-to-go to support customers’ operating requirements.

        Cobham PLC: Located in Davenport, Cobham PLC is a leading global technology and services innovator that provides solutions to the most challenging aerospace problems.    


Conclusion

Iowa has a diverse and innovative economy.  Key economic sectors include agriculture, advanced manufacturing, biosciences and aerospace.  When companies in these and other industry develop products and process improvements, they may be eligible for Research and Development tax credits which are available to stimulate innovation.

Article Citation List

   


Authors

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

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

Lara Tomiko is a Tax Analyst with R&D Tax Savers.


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