The R&D Tax Aspects of Kentucky Innovation



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Kentucky-Innovation
        Kentucky is a diversified economy and a great place for innovators to build their businesses.  Like any healthy economy, innovation is at the heart of driving growth in the state.  Recognizing this, many businesses of all sizes have made Kentucky their headquarters for operations.  Toyota, Ford, and General Motors have significant operations in the state; and these innovators along with others have made Kentucky an automotive manufacturing powerhouse.  Other innovative industries in the state range from advanced manufacturing to bourbon whiskey brewing to thoroughbred horse racing.  Federal R&D tax credits are available to stimulate continuing innovation.

        This article discusses some innovative industries in the Kentucky economy.


The Research & Development Tax Credit

        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 Elimination

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax years.


Transportation Innovation

        Auto manufacturing is a top industry in Kentucky, supporting more than 65,000 jobs. More than 400 automotive-related facilities are located in Kentucky, including major auto assembly plants for Toyota, Ford, and General Motors which makes the Corvette in Bowling Green.  Kentucky Gov. Steve Beshear recognized early in his first term that the state, as the nation’s third-leading manufacturer of light-duty vehicles, “must become the epicenter for the advanced manufacturing technology that will produce the vehicles of tomorrow .”

        His vision led to the creation of the Kentucky Argonne Battery Manufacturing Research and Development Center in 2009, an effort to position Kentucky and the United States as a leader in the advanced battery technologies market which helps support the state’s vibrant automobile manufacturing industries and create jobs.
 
        The center is a partnership between the University of Louisville, the University of Kentucky, and Argonne National Laboratory, which is based outside of Chicago.

        The University of Louisville and the University of Kentucky have strong programs in material development for advanced battery technologies for a range of applications, including vehicles and storage for grid-scale renewable energy such as wind and solar. Argonne is the federal government’s lead laboratory for applied advanced battery research and development. A growing team of researchers at the center are testing different types of batteries to determine which mixtures of metals can produce the most power at the cheapest cost.

        For nGimat, a Lexington, KY manufacturer, Kentucky-Argonne provided an excellent chance to test one of its new nanotechnologies: a highly conductive lithium-ion powder.  Andrew Hunt, nGimat’s CEO and chief technology officer, says the company plans to infuse existing batteries with thin layers of “electrochemical materials that are exponentially better than other materials.”

        The idea is to create superconductive pathways through which electricity can move quickly, allowing power to flow in faster for charging and flow out faster for power. Imagine an electric vehicle that could accelerate like a Corvette and recharge in minutes instead of hours. For more on advanced batteries see “R&D Tax Credits for the High-Risk Battery Business.


KY-Argonne’s New Research Center

        The KY-Argonne Battery Manufacturing Research Center’s brand-new research and development laboratory features a state-of-the-art assembly system that will be used to evaluate new cathode, anode, and electrolyte materials used in lithium-ion (Li-ion) and other advanced batteries.

        The facility features a dry laboratory, clean rooms, wet laboratories, a furnace laboratory, a cycle testing lab, and a materials analysis lab.

        Other innovations in the automotive sector can be found across Kentucky. Hitachi Automotive Products (USA) Inc., a fixture in the state since 1986, is adding an advanced fuel system production line at its 400,000-square-foot facility in Harrodsburg, where the company manufactures electromechanical auto parts. The $20.2 million expansion will add 100 new jobs to make components for use in advanced direct injection fuel systems in more fuel-efficient and lower-emission automobile engines .

Advanced Manufacturing

        Northern Kentucky manufacturing companies play a vital role in the region’s economy. Continued focus on advanced manufacturing for new and existing businesses in Northern Kentucky includes industry sectors such as:

  • Industrial machinery/equipment
  • Process automation/controls
  • Advanced materials/polymers
  • Surgical and medical equipment
  • Medical and pharma products

Mazak
        Mazak (Florence, Kentucky) is a leader in the manufacturing of advanced technology solutions including multi-tasking, 5-axis, milling, turning, CNC controls, and automation.  This technology is used in various industries including aerospace, auto/truck, and consumer electronics. Mazak has been successfully manufacturing some of the world’s most advanced multi-tasking, 5-axis, turning, and milling machines in Florence, Kentucky since 1974. Mazak combines technological and intellectual resources to spur innovation and provides optimized solutions tailored to individual customer needs. This includes on-going engineering efforts to further advance volumetric accuracy confirmation for machining centers using a touch probe.

        As a leading provider of innovative, productive machine tools and systems, Mazak is in the unique position to maintain the production agility and responsiveness businesses require to be competitive and grow. Their production-on-demand manufacturing Facility in Florence, Kentucky ensures that they understand the needs of their markets and allows them to significantly shorten overall lead times and minimize inventory levels so that they can continuously incorporate the latest technology into every machine they manufacture and bring new products to market quickly.


Coal Mining and Next-Generation Sensors for Atmospheric Monitoring Systems

        Although not as productive as they used to be, the coal mines in Kentucky still turn out millions of tons of coal per year.  As workers become increasingly concerned with health issues associated with coal mining, scientists and developers have been creating innovative solutions to address their concerns. 

        The potential for atmospheric monitoring systems to improve mine safety is currently being enhanced by commercially available sensors that can be deployed throughout underground coal mines. Innovators in Kentucky partner to design, develop, and commercialize improved air velocity, low-power methane, and flexible-use carbon monoxide sensors, with wireless and wired data transfer options. Twenty four hour battery backup provides post-accident functionality for these sensors in addition to their day-to-day use to improve mine safety by detecting potentially harmful developments in the mine's ventilation network.  Various industry supporters such as Booth Energy in Debord, KY collaborate with the Kentucky Coal Academy to develop such technologies state-wide.  Such pursuits are often eligible for R&D Tax Credits.


Horse Racing

        Thoroughbred racing is an extremely popular pastime throughout Kentucky. Image quality, presentation, and promotion are among the most important investments any televised sport can make.  FIFA for example, committed $150 million to media production of the World Cup soccer games to bring new people into their game and grow their business. Innovations in sight and sound put the viewer on the field of competition in a way that has forever changed the way viewers experience the game. The up-close and personal images penetrated the U.S. market beyond all expectations.

        The participants in horse racing are beginning to discuss how similar technologies can be implemented to deliver game-changing innovation to their sport as well.  Other innovations involve new ways to wager. For example, some allow players to put more educated bets on their horses, with detailed up to date informatics.  Many investors hope these new technologies will bring new fans into their sport.


Bourbon Whiskey

        Bourbon whiskey is now one of the most innovative alcohol products.  Distillers are making whiskey from unexpected grains, aging them in unique barrels, manipulating them with smoke and more.  Kentucky bourbon makers for example, are looking toward innovation not only to keep the category fresh, but also to attract new drinkers, many of them millenials who enjoy broad varieties and new tastes.  Enter terms like “alternative wood finish,” “small batch,” “single barrel” and “cask strength.” With little wiggle room for experimentation under standards of what constitutes a bourbon, distillers are left to play around with the mash bill, entry proof, wood grain size, and aging location and temperature, char level, and barrel-stave seasoning


Haven Hill Distilleries
        Haven Hill in Bardstown, KY is America's largest family-owned and operated distilled spirits producer and marketer. Heaven Hill Distilleries has grown beyond its traditional roots as a Bourbon distiller to become the country's seventh largest overall distilled spirits producer and marketer with a portfolio of well-known, innovative and relevant products. Some of their core values include the following:

  • “Continuous Improvement: We learn from our successes and failures and constantly seek better ways to do things every day.
  • Nimble: We embrace our future together, react quickly to changing circumstances and achieve results faster than our competitors.
  • Resourceful: We are creative and do not let barriers prevent us from getting the job done."


Kentucky Innovation Network

        The Kentucky Innovation Network was founded in 2001 in order to create a network of business leaders and mentors to encourage relationships, grow companies, and create jobs. Currently, they have thirteen offices spread throughout Kentucky who assist over 1,300 companies and support over 6,500 jobs in the state. 

        The network is managed in partnership with the Kentucky Cabinet for Economic Development and Kentucky Science and Technology Corporation, along with local partners. Each office is staffed by experienced and educated business leaders who connect small businesses, researchers, and university professors with the goal of fostering development, implementing growth strategies, and locating funding for R&D projects.


University of Kentucky

        The U.S. Department of Agriculture recently named the University of Kentucky School of Human Environmental Sciences a national coordinating center for excellence in nutrition education and obesity prevention research. The topic is especially urgent for Kentucky, with some of the highest rates of obesity in the country.

        At the Food Systems Innovation Center the vision is a strong economy supported by enterprises that produce safe and healthy products to benefit producers, processors, consumers, and communities.
       
        The mission at the facility is to provide technical and business development services to facilitate the profitable production, processing, and marketing of locally produced and processed food by Kentucky-based enterprises and entrepreneurs .  For more on food processing innovation see “R&D Tax Credits for Modern Food Processing”.



Conclusion

        Like any healthy economy, innovation in Kentucky is at the heart of driving growth.  Federal and state R&D tax credits are available to stimulate efforts towards a more advanced state.

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