The R&D Tax Credit Aspects of Miami Start-Ups



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Miami-Startups
        For the second year in a row, Miami ranked number two in the Kauffman Foundation’s Index of Start-Up Activity, which measures new business creation in the forty largest metro areas in the country. Miami’s density, measured as the number of new employer businesses normalized by total business population, was second-highest in the nation and the share of opportunity entrepreneurship was 78 percent.  The present article will discuss the different reasons why Miami is quickly emerging as an international hub for innovation. It will also present the tax credit opportunities available to support Miami-based start-ups and increase their chances of success.   


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.


R&D Tax Credit For Start-Ups

        The new federal tax law is extremely beneficial for start-ups.  For the first time ever, a qualifying start-up can use the credit against $250,000 per year in payroll taxes beginning January 1, 2016.  Essentially, with the new start-up provision, companies can claim the credit even if they do not pay income tax and regardless of their profitability.

Tax Credit Example
        A company owes $300,000 in payroll taxes and they qualify for $100,000 in R&D tax credits. The R&D credit can now be applied to payroll taxes. Therefore, the amount of the payroll tax that has to be paid is reduced to $200,000. The most amount of money that can be deducted annually from the payroll R&D Tax Credit is $250,000. Therefore, if the company qualifies for $300,000 in R&D credits, the company would now only owe $50,000 in payroll taxes.

Tax Benefit Chart
        The below table illustrates the start-up tax savings available to Miami-based start-ups at different total company and technical employee levels, up to 1,431 companies as registered on AngelList, a platform for start-ups and investors, on October 22, 2016.



The Florida Tax Incentives

        One of the great incentives for firms relocating to Miami is a highly advantageous tax structure. In addition to the absence of state income taxes, Florida has one of the nation’s lowest corporate taxes, at 5.5 percent.  State R&D tax credits also contribute to this favorable scenario. For qualifying corporations, the state of Florida R&D Tax Credit amounts to 10% of qualified research expenses (QREs) incurred in the state. The funds are available on a first come, first serve basis, with a total pool of $23 million in available funds for the 2016 application period (up from the previous $9 million per year). The annual available funds revert back to $9 million after the 2016 application period. The state requires that the credit applicant be involved in a “target industry business.” The Florida Department of Revenue defines these industries below:

Manufacturing
Life Sciences
Information Technology
Aviation / Aerospace
Materials Science
Homeland Security / Defense
Cloud Technology
Nanotechnology
Marine Sciences


        Many companies and start-ups relocating to the greater Miami area are primed for both the federal and Florida R&D Tax Credits, as a large percentage of companies are in qualifying industries and meet the necessary criteria.


The Economic Landscape

        Though internationally famous for the sun, beaches, and tourists, Miami is actually much more than that. For starters, Miami-Dade is Florida’s most populous county, with over 2.5 million residents. Home to one of the most vibrant and diverse communities in the nation, Miami is an international hub for people and businesses from all over the globe. Its unique location makes it a strategic gateway to the Americas and a privileged route for trade with Europe, Asia, and Africa. Miami’s superior infrastructure includes Florida’s number one deep-water cargo container port, which does business with 250 ports in 100 countries, and is the top U.S. airport for international freight and second for international passengers. The Miami-Dade County is home to over 70 foreign consulates and trade offices and over 1,100-plus multinational corporations which operate in the area.


An Entrepreneurial Ecosystem

        fDi Intelligence, a specialist division of the Financial Times, listed Miami among the top 10 “American Cities of the Future” for 2015/16. The city ranked particularly well in the business friendliness (#2) and foreign direct investment strategy (#3) categories.  Even though Miami has not traditionally been listed among the country’s innovation epicenters, it is increasingly recognized as an inescapable, rising force. The 2015 annual ranking of the fastest-growing private companies in America, known as Inc. 5000, listed 139 start-ups and companies based in the Miami metro area.

        As one of the most preeminent locations for the growing Hispanic power in the U.S., Miami is where the Americas converge. For this reason, relocation rates have surged, as numerous companies are deciding to establish their Latin American headquarters in the area. In the words of Laura González-Estéfani, Director of Partnerships & Mobile LatAm for Facebook, “Miami is the perfect place to start or grow your business, specially if you are interested in an international venture. There is talent, there is support from the institutions and private initiatives that are focused on boosting innovation, and there is an incremental interest from VCs and business angels for innovative projects.” Like Facebook, companies such as Google, Twitter, Uber, Lyft, and Vice have also moved to Miami.

        Education and mentorship opportunities, as well as, a growing number of accelerators and incubators, co-working spaces, and innovation events are among the main causes for Miami’s emergence as a start-up hub. The following sections will present an overview of each one of these aspects.


Education and Mentorship

        There is no shortage of skilled workforce in Miami.  With 15 colleges and universities, the area attracts creative minds from all over the globe and ranks seventh in the nation in per capita enrollment of higher education students.  The following institutions are good examples of how Miami’s academic community has fostered entrepreneurship:

The University of Miami (UM)
        Created in 2008, the Launch Pad at UM offers guidance, resources, and advice to entrepreneurs, innovators, and investors. With a system of free venture consulting, over 350 companies created by UM students have become successful. Its objective is to show students and alumni that starting a new venture is a legitimate career path, while also encouraging them to do so in South Florida and thereby contribute to the economic and social growth of the region. Among Launch Pad’s success stories is Splyst (which later became Emogi), a company that aims to make the power of emotion universally available and useful. Using a proprietary Emotion Engine, Emogi’s platform combines big data, research, and emojis to provide meaningful, real-time emotional intelligence to marketers. UM alumnus and Emogi founder, Travis Montaque, has received various awards, including Forbes 30 Under 30, category Marketing & Advertising.  

Miami Dade College (MDC)
        Working in partnership with the Knight Foundation, the Idea Center at MDC aims to create an ecosystem of creativity, innovation, and entrepreneurship for students and community members. It offers over 15 experimental-learning, immersive programs that provide new entrepreneurs with the relevant skills to start their businesses. The Idea Center’s initiatives are divided into seven areas, namely, design thinking, lean start-up, design and prototyping, coding, digital marketing, data analytics, and technology.

Florida International University (FIU)
        With the highest number of Hispanic graduates with STEM degrees in the country, FIU is a privileged environment for technological innovation. The recently established Start-up FIU aims to foster entrepreneurship through the creation of new start-ups, acceleration of early-stage companies, and commercialization of novel, ground-breaking technologies. The initiative’s first cohort started in September 2016 and included three new incubators and an accelerator program, which are strategically located at different addresses throughout Miami, in an effort to explore business opportunities beyond the Brickell/Wynwood corridor. Besides being open to various segments of the economy, Start-up FIU intends to offer an inclusive approach to innovation, where entrepreneurs from the university and the community will work together.

        Miami is also experiencing a growth in coding schools, which are key to providing the necessary skills to support the emerging tech industry. Examples include Wyncode’s Ironhack, 4 Geeks Academy, CodePRO, Code Fever, and the Florida Vocational Institute.


An Active Start-Up Community

        Over recent years, Miami has become home to various events that aim to bring together the start-up community, create opportunities for the fruitful exchange of ideas, and build momentum for further innovation. Business-to-business technology and innovation conference eMerge Americas is an iconic example. Created in 2014, it aims to establish Miami as the technological hub of the Americas, connecting business and government leaders across Latin America, North America, and Europe. eMerge 2016 attracted over 13,000 participants from more than 60 countries, and over 400 companies and 110 start-ups.

        Sime/MIA is another interesting example. Aimed at making Miami a thriving city within the global tech ecosystem, this annual conference is a partnership between Sime, Northern Europe’s largest conference about the Internet and digital opportunities, and the MIA Collective, an organization that produces digital business and technology events in Miami. Strategically held on the eve of Art Basel Miami Beach, one of the top art exhibitions in the world, Sime/MIA intends to become Miami’s premier digital conference that bridges technology and art. In 2015, the conference focused on financial technology and big data. The event’s fourth annual conference will be held in November 2016.

        Other noteworthy initiatives include Black Tech Week, an immersive, week-long series of events that aim to increase the number of start-up founders, technology executives, and engineers of color, and Techweek Miami which operates in eight cities across North America and organizes Launch, one of the most prestigious start-up competitions in the country.


A Wealth of Co-Working Spaces

        Miami has experienced a wave of new co-working spaces created to accommodate its start-up entrepreneurs, small businesses, freelancers, and service providers. Designed to meet the everyday needs of growing businesses, these spaces combine flexibility, cutting-edge design and infrastructure, and a wide variety of amenities, from fresh brewed cof fee to fiber connectivity. According to a list from the Miami Downtown Development Authority, the Brickell-Downtown Miami area alone is home to over twenty collaborative working spaces, including CityDesk, KeyWork ing, Quest, 360Spaces, Building.co, Mindwarehouse, Delray Tech Space, Pipeline, and StartHub.

        Co-working options are not, however, limited to the urban core. A growing number of companies are expanding and building networks of locations. The Büro Gro up, for instance, has buildings in South Beach, MiMo, and Coconut Grove, in addition to its original, 18,000-square-foot Midtown location. WeWork opened its first Miami space in July 2015, which consisted of a 40,000-square-foot outpost on Lincoln Road, has since expanded to two other locations and signed a lease for a new, 96,000-square-foot building.

        One of the most recent players to make a move into Miami’s co-working market is the Cambridge Innovation Center (CIC). With locations in Cambridge, Boston, St. Louis, and Rotterdam, the company recently launched a new, 70,000-square-foot center at the University of Miami Life Science & Technology Park. Intended to help anchor an innovation district for Latin America, CIC Miami is expected to house over 500 tech start-ups.


Accelerators, Incubators & Funding

        Miami’s emerging entrepreneurial ecosystem takes advantage of a growing number of start-up accelerators and incubators, which have contributed to numerous success stories. The next paragraphs present a brief overview of ongoing initiatives:

Venture Hive: This accelerator program is designed for entrepreneurs within the creative, financial technology, hospitality, healthcare, and trade/logistics technology industries. Besides providing tailored mentoring, Venture Hive offers a $25,000 non-equity grant, free office space for six months, and support with network access during a three-month structured program. While previous editions of the program had mostly international participants, in 2016, five out of the ten companies selected for the Venture Hive accelerator were Miami-based. Companies include Whimzy Entertainment, creator of HeroBoys, a line of toys and comic books, and Eisof Biohealth, creator of Speedlyte, a pediatric rehydration solution.   

Endeavor: Launched in 2013, Endeavor Miami aims to provide high-impact entrepreneurs with the talent, capital, and mentorship necessary to scale their businesses. It currently supports 15 companies in the software, technology and IT, and food and beverage industries. Examples include SkyPatrol, creator of a proprietary GPS tracking technology that provides real-time metrics on mobile assets, and e-learning platform LearnerNation. Endeavor Miami’s companies are expected to generate over $100 million in revenue and create more than 1,500 jobs. 

500 Start-ups: Silicon Valley venture capital seed fund and start-up accelerator 500 Start-ups launched its Miami Distro Program in September 2015. Participants of the 10-week, growth-focused training and implementation program receive between $150,000 and $250,000 in funding ($50,000 of that allocated to the Distro program fee and another $50,000 earmarked for growth marketing spending) as well as access to guidance from a team of specialized mentors. The first edition of the program included Miami-based companies, such as ClutchPrep, creator of textbook-specific videos for college students, and provider of facial analysis technology Kairos.  

EcoTech Visions: Miami’s first “green” business incubator and accelerator, EcoTech Visions aims to assist entrepreneurs in creating, planning, and launching sustainable manufacturing businesses in South Florida. It offers office space, a prototyping lab, and business resources, including training and technical support.

Startupbootcamp: Operating in eight countries, Startupbootcamp is Europe’s largest business accelerator. In 2015, the organization chose Miami as its first U.S. location, where it will focus on supporting digital health start-ups. Between 2016 and 2018, Startupbootcamp will hold annual programs with 10 selected companies per year. Each participant will receive six months of free co-working office space, a seed investment of $20,000 with possible additional investments up to $100,000, and in-kind services from partners such as Google, PayPal, and Amazon Web Services.

        Many of the initiatives highlighted above receive support from the Knight Foundation, one of the most preeminent groups in Miami’s entrepreneurial scene. Committed to building an environment where start-ups can thrive, the non-profit has made more than 180 investments in entrepreneurship activities in South Florida since 2012, totaling over $20 million in funding.

        Besides accelerators and incubators, Miami’s promising start-up market has also attracted a growing inflow of capital. For instance, AGP Miami, the largest local angel group, has quadrupled its members, up to 80 investors, in the past two years. So far, the group has invested in 14 firms, for a total of $2.8 million.  Other examples include the Miami Innovation Fund, which focuses on very early-stage technology innovation, and Krillion Ventures, a “homegrown”, $50 million venture fund. Founded in 2014 by two longtime Miami entrepreneurs, Krillion has a “Miami First” strategy. As of January 2016, it had invested in seventeen start-ups from the financial services, transportation, logistics, real estate and healthcare sectors.

Key Industries

        Despite the remarkable diversity of Miami’s entrepreneurial community, two key industries have stood out as major drivers of innovation. Bellow we see some trends and opportunities, as well as, examples of Miami-based companies in each of these areas.

Software, Technology, and IT
        Besides attracting tech giants, who are establishing their LatAm headquarters in the city, Miami has experienced a multiplication of smaller, versatile tech start-ups that specialize in a variety of applications.  Financial
technology is a particularly dynamic area, with initiatives ranging from mobile banking to peer-to-peer lending platforms.  Examples of innovative, Miami-based FinTech companies include PsychSignal, creator of a groundbreaking natural language processing technology that scans social media posts related to stock prices and translates them into numerical data that reflect traders’ “moods” regarding said stocks. Also in the FinTech sector, YellowPepper is an iconic illustration of Miami’s privileged access to the Latin American market. The company provides mobile payment and mobile banking solutions for Latin American countries. In 2015, it raised $19 million in venture capital and launched various mobile payment applications in Mexico, Colombia, and Ecuador.

        Another important vector of growth in Miami’s tech market is cyber security, an area that has gained notoriety due to the ongoing multiplication of dangerous and pervasive cyber threats.  In September 2016, the Idea Center at Miami Dade College hosted the first CyberMiami, an international conference aimed at connecting entrepreneurs from Latin America, the U.S., and Israel.

Healthcare and Medical Technology
        Miami is emerging as a global center for healthcare innovation.  As pointed out by Startupbootcamp Miami founder and managing director, Christian Seale, “Miami is the second largest healthcare hub in the U.S., with 8 hospitals, over 33,000 beds, three globally recognized research universities, and a legacy of successful healthcare companies.”

        An iconic example of success in this area is CareCloud, one of the nation’s leading providers of cloud-based health IT software and services. Founded in 2009, it provides a series of integrated applications spanning electronic health records, patient engagement, practice management, and revenue cycle management. CareCloud was recently awarded “Best User Experience” at the 2016 Software-as-a-Service Awards, a global competition. Its innovative platform has been adopted by thousands of physicians in 49 states and currently helps manage over $4 billion in annualized accounts receivables.  

        Start-up Mediconecta is also an interesting example, as it brings together healthcare, technology, and a focus on Latin America. Winner of the 2016 eMerge Americas start-up competition, the telehealth company provides on-demand medical consultations via videoconference. With an in-house network of physicians and a proprietary platform, Mediconecta’s services are available via web, mobile app, or kiosks. According to the Miami Herald, Mediconecta is currently the largest telemedicine provider in Latin America with a presence in Mexico, Chile, Ecuador, Venezuela, and Peru. The company aims to expand into other specialties and product lines, including for U.S. Hispanics who have families in Latin America.


Conclusion

        Miami is undoubtedly one of the hottest start-up spots in the country. It is the perfect combination of a strategic location, a wealth of diverse, skilled workers, and a vibrant entrepreneurial community, supported by both mentorship and funding opportunities. Miami-based start-ups that already enjoy a privileged environment for innovation can further enhance their chances of success by taking advantage of federal and state R&D Tax Credits.

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