The R&D Tax Credit Aspects of Massachusetts Innovation



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        The Massachusetts economy is actively participating in the global innovation effort.  Kendall Square in Cambridge is one of the most innovative and well known research centers in the world. Cutting edge companies like Google, Microsoft, Amazon, and Twitter all have operations there.  Meanwhile world class research institutions like MIT, Tufts University, and Harvard University collaborate with local businesses in the region to bring innovation to market. In addition, the Department of Defense (DoD) contracts out research projects in the state as well.  Massachusetts currently ranks fifth in the nation in total DoD spending. 

        Smaller businesses in the state are also innovating.  In 2014, a team of former Google employees launched a consumer shopping service called Mobee to give retailers a new way to get insights from customers. 

        PlateJoy, another recent start-up, provides an innovative way of delivering food to the Boston area by simplify the process of planning weekly meals for families.  Simply tell the service some basic details about your family size and dietary preferences and PlateJoy will recommend recipes and deliver the ingredients within 24 hours.


        Small businesses like Mobee and PateJoy and larger ones like Google and Amazon enjoy favorable government and economic policies in the state.  Massachusetts invests over 5% of its Gross State Product in R&D, the best performance of any single region in the world.  

        The state is home to over 150 robotics companies. Those companies employ over 3,200 people and bring over $2 billion in sales to the state annually.  The Commonwealth uses the innovation atmosphere as a main anchor in its economic strategy.  It also uniquely collaborates with other innovating regions such as Israel by sharing ideas in order to ensure the future prosperity of both regions.   

        This type of collaboration is part of an emerging philosophy to foster innovation through idea sharing and cooperation among entities.   Federal and state tax credits are available to stimulate the innovation efforts in Massachusetts.


The Federal 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.


Massachusetts State Tax Credit

        Massachusetts offers a tax incentive for research and development investment for both manufacturers and R&D companies.  This tax incentive was designed to remove any obstacles to R&D investment and spur growth and innovation throughout the Commonwealth. The state tax credit closely resembles the federal credit program; however, it specifically offers qualifying Massachusetts companies many unique features for doing business in the state.


Demographics

        As of 2013, Massachusetts has a population of about 6,692,824.  This is a slight increase of about 2.2% since 2010, which is similar to the national average of 2.4% for the same time period. Expanding populations are a good indicator of economic prosperity.

        In addition to the expanding population, the state is also highly educated.  About 39% of the population reports having at least a bachelor's degree, compared to the national average of about 28.5%. Those numbers represent the highest in the nation.

        This population is also comprised of a slightly larger than average elderly group.  About 14.8% of the population is over the age of 65, compared to a national average of about 14.1%. 

        The slightly older and more sophisticated population serves as a good fit for the dominant robotics market in the region.  Many spectators expect robots to play a large role in caring for the elderly in the near future and most robotics companies prefer to hire individuals with a technical educational background.


The Massachusetts Robotics Cluster

        Massachusetts is the worldwide epicenter of the recent robotics revolution.  The Commonwealth is home to over 150 robotics companies which report almost $2 billion in annual sales and employ more than 3,200 people.

        The robotics industry in Massachusetts and the larger global market are expected to keep increasing as well. By 2020, the market for global industrial robotics is expected to reach a value of $44 billion.  In the state, at least eighteen new Massachusetts start-up robotics companies have been launched since 2008.   That has resulted in an increase of over 900 robotics jobs there since that period.  Revenue in the industry has grown at an impressive rate of over 11% annually.  

        The chart below shows how the Massachusetts robotics industry is rapidly growing in multiple categories. For more information on the Massachusetts robotics cluster see R&D Tax Credit Aspects of Massachusetts Robotics Cluster.



2008

2011

% Increase

Sales

$1.3B

$1.9B

45

Employment

2,300

3,200

39

Private Investment Dollars

$17.7 M

$52.4 M

200

Private Investment Deals

3

8

167

Exits

$80 M

$775 M (2012)

869




        In addition to the robotics cluster other industries in the area are innovating as well.  The robot industry supports an ecosystem of robotic software and robotic controller companies and the manufacturing, biotech, and pharmaceutical industries are dominant users in this area.



Cambridge & Kendall Square

        Kendall Square and the Cambridge area represent a large cluster of innovative businesses, universities, and collaborations.  Cambridge is the East Coast's main innovation hub. Known as the 'Silicon Valley of the East', the region is home to a number of the world's most innovative organizations.  Companies are attracted to the area largely because of its close proximity to world class research institutions such as MIT and Harvard.  Many others are born there as start-ups created by local university graduates and faculty. 

        MIT, for example, has a mission to accommodate entrepreneurial spin-outs. The initiative has led university leaders to pursue investments like the Cambridge Innovation Center and LabCentral.  Both of these facilities have been proven adept at accommodating small businesses and start-ups.  The Cambridge Innovation Center hosts over 450 companies, many of which started out as small bootstrapping operations and eventually evolved into tech giants like Amazon.


Boston

        In addition to Cambridge, Boston is also an extremely innovative community.  The city has recently attracted a large number of tech start-ups.  In 2013, Boston had even more venture capital deals than its neighbor, Cambridge.  Boston based companies closed 97 venture capital deals in 2013, up from 66 deals in 2012, according to CB Insights, a data firm that tracks the venture capital industry.

        Innovative start-ups are attracted to Boston to set up operations due to the city's extensive infrastructure and relatively cheaper rent than Kendall Square.   Raj Aggarwal, CEO of Boston startup Localytics, which relocated to Boston from Kendall Square in late 2012, had this to say about the city, "There are more subway lines, and it's a little hipper in the downtown in many ways because there's better food."
   
        There are no signs of innovation slowing anytime soon in Boston.  In addition to the growing start-ups already located there, the Cambridge Innovation Center is preparing to make the city even more attractive by opening an office in Boston's Financial District that will house 300 companies.



Biotech & Pharmaceuticals

        The Massachusetts biotech and pharma industries are also broad and innovative, with over 700 firms that employ over 57,000 workers.   These companies range from large, well established players like Pfizer, who plans to open a new R&D facility in Cambridge in 2016, to small start-ups like Dimension Therapeutics, also in Cambridge, which was founded in 2013 and holds over 100 patents. 

        Other recent start-ups in the Cambridge area include NextCode which was founded in 2013 and recently secured $15 million in venture financing; and Editas Medicine also founded in 2013 which recently announced the first U.S. patent for a CRISPR-Cas9 system that allows scientists to modify genes and better understand the biology of living cells and organisms.  Start-ups like these helped propel the industry to 41% growth between 2004 and 2013.  In fact, Massachusetts has such a large market for biotech start-up funding that it made up over 33% of all U.S. seed-stage funding for the biotech industry between 2009 and 2013.

        Much of the growth in the industry during that period can be attributed to R&D efforts.  In 2013, Massachusetts received $2.3 billion in National Institutes of Health (NIH) funding for basic research.  That number is more than twice the per capita NIH funding for the next closest state, Texas.  As of July 2014, Massachusetts was home to 1,384 drugs in development, from research project to pending approval stage.


Massachusetts Israel Innovation partnership  

        The Commonwealth of Massachusetts and Israel have an ongoing memorandum of understanding to promote greater collaboration among companies in the two jurisdictions.  Both jurisdictions have similar commitments to life sciences and clean alternative energy.  The collaboration researches projects which further the innovation agendas of both governments.  Such initiatives include finding reliable and clean sources of energy and water which are long time national priorities for both Israel and the United States.  

        Applicants applying for such funding should create a team which comprises of at least one Massachusetts based company and one Israel based company.  The goal of the collaboration is to ensure mutual prosperity and leverage the talents of the uniquely skilled workforces in both regions.


Massachusetts Biomedical Initiatives         

        Massachusetts Biomedical Initiatives (MBI) is a private, independent economic development organization dedicated to job creation and innovative healthcare throughout Massachusetts.  The group promotes collaboration between local businesses, government, and academic institutions in an attempt to make Massachusetts the world leader in the health sciences industry. 

        The group also helps create biomedical companies which, in turn, mean new jobs in the biotechnology, medical device, informatics and bio-manufacturing industries.  MBI provides clean working areas, trained staff, and fully licensed laboratory space for start-up companies in the region.  The goal is to lower the barriers to success for these seed stage companies by providing cost effective solutions.

        To date, the company has invested over $8 million in public funding and over $50 million of private money in new technology driven companies.  Companies that have received such funding now employ over 2,000 people, 1,500 located in central Massachusetts alone.  These same companies also have over $50 million a year in payroll and have raised over $600 million of additional financing which has significantly fueled economic growth in the region.
  


Defense Technology

        Innovative Massachusetts companies have a long and deeply rooted contracting history with the federal government.   The DoD and the Department of Homeland Security (DHS)have contracts which help fund almost 2,500 private companies statewide. These companies support over 130,000 jobs and were awarded $13.7 billion in DoD and DHS contracts in 2012. That $13.7 billion amounts to about 9% of all total U.S. defense and Homeland security contracts for 2012.

        Researchers in the industry conduct research in communications, robotics, underwater autonomous vehicles, and advanced imaging systems.   

        Other research initiatives in the defense industry include the manufacturing of ships, submarines, rotary wing aircraft, guided missile systems, engines, turbines and other transportation device components.


Manufacturing

        Manufacturing in Massachusetts is the top contributor to gross state product (GSP).  The industry employs more than 250,000 of the state's residents.  There is robust innovation within the Massachusetts manufacturing industry.  Jack Healy, Director of Operations for MassMEP, an resource organization which helps manufacturing companies grow and innovate, had this to say about innovation in manufacturing,

        "Formerly, competition in manufacturing was determined by capital investment and low labor costs.  Today's manufacturing competitiveness is being determined by a skilled and technology enabled workforce capable of creating value in both processes and products."

        Some manufacturers are seeking to capitalize on the sophisticated workforce in Massachusetts.  Evoqua, a water technology company with headquarters in Pittsburg broke ground in March 2015 on a new production facility in Tewsksbury, MA to replace its existing facility in Lowell .   The old manufacturing facility will become a new R&D facility as it expands into the vacated space.  The company is expanding R&D operations in order to accelerate commercialization of many of the new technologies currently in development.  

        This expansion has been largely prompted by market demand for Evoqua's CEDI technology across the globe.  Evoqua's Ionpure CEDI technology is used in process and product water treatment where reverse osmosis alone cannot provide the high degree of purity required.  The growing worldwide water shortage is creating a large demand for these products.vii

        Siemens, the large industrial manufacturer with a major automation segment is also investing in the Massachusetts workforce. The company recently announced nearly $660 million in software grants to fund manufacturing programs in local high schools, technical community colleges, and universities throughout the state.  The funding will provide the students access to innovative product lifecycle management (PLM) software which is commonly used in the manufacturing industry to design and produce a wide range of high-tech products in a wide range of industries including medical devices, machinery, shipbuilding and high-tech electronics.   

        Investing in students and education is priority in Massachusetts.  It is hard to maintain such an innovative community without a very sophisticated workforce.  Some innovative Massachusetts learning institutions are discussed below.


Harvard

        The range of research activities at Harvard is broad and deep.  Harvard scholars conduct research in a wide variety of fields and seek to expand human knowledge through analysis, innovation, and insight. Harvard research projects are supported by more than $750 million of sponsored research funds each year and are carried out in 13 Harvard school departments, the Radcliffe Institute for Advanced Study, along with more than 100 research centers, many located in Massachusetts.  In the words of Harvard Dean, Cherry A. Murray,

        "Given the stunning intellectual strength and breadth of Harvard, our engineers and applied scientists are smack dab in the middle of one of the most amazing places in the academic universe." 


Worcester Polytechnic Institute

        Worcester Polytechnic Institute (WPI) is committed to providing hands-on, practical education for tomorrow's robotics engineers.  They became the first university in the nation to offer a Bachelors Degree in robotics engineering in 2007.  Their research focuses include not only robotics innovations but a broad range of disciplines including bioengineering, life-sciences, education technology, and energy and sustainability. 

        WPI research initiatives include enhancing the production of ethanol from cellulose (funded by a leading biofuels manufacturer) and developing technology that will facilitate highly fuel efficient hydraulic hybrid vehicles. In addition, researchers at the WPI Fuel Cell Center are working to make electrochemical devices practical as power sources for everything from automobiles to laptops.   

        In the WPI Materials Science & Engineering center, researchers are concerned with making stronger materials, improving manufacturing, and helping recycle materials to save our natural resources and reduce energy consumption.  WPI's Metal Processing Institute is the largest university-industry consortium in North America.  Its six research centers conduct work on casting, powder metallurgy, heat treating, and helping America's most important industries stay up to date and competitive.  This is all consistent with the university's reputation for providing practical, hands on experience for tomorrow's innovators.


Massachusetts Institute of Technology (MIT)

        MIT is known as one of the most research oriented universities in the country.  The university helped invent the transistor radio, radar, modern robotics, and has played a large role in developing the field of biotechnology.  Its graduates include a treasury secretary, an Israeli prime minister, an astronaut who walked on the moon, and several Nobel Prize winners.

        MIT's new president, Rafael Reif, has recently made a school-wide initiative not only to be the leader in technological innovation but also in entrepreneurship throughout the 21st century.  The Office of Education and Innovation Technology (OEIT) works with the school's faculty to merge innovation and technology.  The plan is to bring the results of research and development to market more effectively.


North Eastern University

        Northeastern University is home to more than 30 federally funded research centers which have recently made advancements in various industry sectors including cyber security, drug discovery and delivery, healthcare delivery and policy, infrastructure resilience, and urban sustainability.   The school attributes much of this success to global collaborations with industry, government, and other academic institutions.
 
        The goal at the Center for Research Innovation (CRI) is to bridge the gap between laboratory research and need-based solutions.  The center pursues this initiative by scouting local disclosures for relevant opportunities and acts as a conduit between industry and university innovators. The majority of the staff at the CRI has prior entrepreneurial experience which creates an agile and industry-responsive team focused not only on innovation but also entrepreneurship.  


Tufts University

        Innovation and collaboration are the foundations of discovery at Tufts.  Recent research projects include advances in nutrition research and telecommunications to more recent explorations into soft-bodied robots, water on Mars, and the criminal justice system.  The Carnegie Foundation ranks Tufts as an institution with "very high research activity"- its highest classification for degree-granting colleges and universities. The university's research commitment is focused on the community coming together around ideas in creative and compelling ways, pushing boundaries, and asking the questions that will take their knowledge to the next level.


University of Massachusetts

        The UMass is another premier research university in the Massachusetts area.  In 2014, the school received over $489 million in annual research and development funds.  UMass faculty members provide undergraduate and graduate students with research opportunities in a multitude of disciplines including clinical and translational science and other life sciences, nanotechnology , computer networking, food science  cell engineering, renewable energy, environmental science, bioinformatics, marine science, bio-engineering, advanced materials, and nanotech manufacturing. 

        Over the past few years, the total amount of external grants and contracts for UMass Boston has increased steadily from $42.2 million in 2009 to $57.3 million in 2013, an increase of 35.69%.  These figures set a new record for the university in each of the last five years. The latest significant awards include an IGERT (Integrative Graduate Education and Research Traineeship) grant of over $3.1 million, three CAREER awards, six Graduate Research Fellowships from the National Science Foundation, and many R00, R01, and R21 grants from the National Institutes of Health.


Conclusion

        The focus on research and development is central to Massachusetts' overall economic strategy.  The Commonwealth is one of the most innovative regions in the entire world.  The robotics cluster, the Cambridge area, the biotechnology and manufacturing industries, and the DoD contracts make up the heart of the economy. 

        State run programs and other local initiatives supplement innovation in this sector by encouraging collaboration and idea sharing.  Local universities like Worcester Polytechnic and Northeastern University are striving to bring more research and development to market. 

        Federal and state tax credits are available to stimulate and support innovation efforts for companies of all sizes in Massachusetts.


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