Manhattan's Silicon Alley Federal & State, Tax Credit Opportunity



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        On top of creating thousands of jobs, the boom in New York City's high-tech start-up industry is sure to present a substantial R & D tax credit opportunities. Manhattan's "Silicon Alley," located in the Chelsea and SoHo neighborhoods, is attracting tech companies large and small. From a tax standpoint, the more time spent developing new products and technical services, the greater the likelihood that companies will qualify for the R & D tax credit.


R & D Tax Credit Defined

        The Research and Development Tax Credit, Federally enacted in 1981, allows a credit of up to 13% of eligible spend for new and improved products and processes. Qualified research must meet the following four criteria:
  • New or improved product, 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 obtaining a patent.


The NYC Tech Market

        A recent Wall Street Journal report puts the current number of high-tech jobs in Manhattan at 90,723, up from around 70,000 in 2005 . While much of this growth is due to the establishment of large national headquarters for tech giants such as Google, Twitter and Yelp, the increased number of high-tech jobs also reflects many small companies' entry into the city market. These companies are lured to Manhattan because of the access to talent, investors, and customers Silicon Alley provides.

        The high concentration of resources in one geographic area provides efficiencies similar to those enjoyed by companies clustered in Silicon Valley, California. R&D activity in both areas reflects a movement toward interconnectedness and open knowledge sharing. Rather than pour large sums of money into in-house R&D programs, high-tech firms are finding ways to leverage the knowledge and creativity of outside sources. Geographic clustering facilitates this trend.

        Manhattan's local officials are making their best efforts to promote further development of Silicon Alley. For instance, the city plans to assist many potential applicants in obtaining jobs at newer start-ups. Further, the deputy mayor for economic development, Robert K. Steel, has gone on record saying that the attraction and retention of technology companies is central to the city's long-term economic growth plans .


Creating a High-Tech Campus

        Another way in which New York City aims to promote Silicon Alley is through the creation of a new, vast, tech-centered campus. When Applied Sciences NYC, a division of the New York City Economic Development Corporation, solicited proposals for the campus, they underestimated the volume of submissions they received. Several of the nation's leading research institutions, ranging from New York University and Stanford University to the New York Genome Center and the Mount Sinai School of Medicine, have garnered attention for their ambitious plans to develop anywhere from 400,000 to 2,000,000 square feet of research and applied science laboratories. Each submission has been so impressive that Mayor Bloomberg recently hinted that the city might be willing to help fund two research campuses.

        While the winner of the Applied Sciences NYC proposal is expected to be announced in January, 2012, NYU has already created a momentum shift in the city towards increased research facilities by merging with Brooklyn Polytechnic Institute. The merger, which occurred in 2008, greatly augments NYU's technical course offerings.


The Added New York Benefit

        In addition to the federal R & D tax credit, New York State offers an additional 18% credit for Qualified Emerging Technology Companies (QETC). To qualify, a company must meet requirements similar to those for the Federal R&D tax credit.

In addition, a qualifying firm must have:
  • 100 or fewer full-time employees
  • At least 75% of full-time employees employed in New York State
  • Annual sales less than $10M and gross revenue less than $20M
  • NY-based R & D expenses must be over 6% of net sales.

        Additionally, New York State qualifying companies must be in one of the following industries: information & computer technologies, advanced materials & processing technologies, engineering, production, & defense technologies, electronic & photonic devices, biotechnologies, or remanufacturing technologies.

        The start-ups now moving into Silicon Alley are primed for the QETC credit, as the majority of them are in a qualifying industry and meet the criteria necessary to receive an 18% R & D tax credit. The QETC credit has the added benefit of being fully refundable, unlike the federal R & D credit. This means that a qualifying company without the tax capacity to utilize the credit can essentially use the NYS credit as cash venture capital funding.



Facebook "Friends" New York

        According to Chief Operating Officer Sheryl Sandberg, Facebook will add thousands of jobs in 2012 , likely due to its proposed IPO. Eager to court the tech giant, New York City has unveiled plans to assist Facebook in opening its first engineering space outside of Silicon Valley in early 2012. In so doing, the city is poised to capitalize on many new jobs Facebook plans to create, providing Silicon Alley with one of the industry's prize tenants.


Conclusion

        Like Facebook itself, Silicon Alley is a connected network of companies. The innovations which result from this nexus of activity will frequently be collaborative in nature, reflecting the efforts of an entire ecosystem including universities and tech firms large and small. Federal and New York state R & D incentives reward and incentivize these efforts. As Silicon Alley develops, tax planners should familiarize themselves with how New York is preparing for the future.

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