The R&D Tax Aspects of Miami's Emerging Tech Scene



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Miami Tech Scene

        In recent years, numerous regions throughout the East Coast of the US have seen a rapidly developing technology sector. Some of these areas include Silicon Alley (New York City), Brainpower Triangle (Cambridge, MA), Research Triangle (Central North Carolina), and Dulles Technology Corridor (Northern Virginia). The next technology hotbed may be Miami, where the city hopes that the weather, more manageable cost of living, and available financial capital will help attract entrepreneurs as well as established companies to operate in the area.



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 experimentation
    
        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 19, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year.



The Miami Landscape

        Joel Kotkin, distinguished professor and author on global, economic, political, and social trends, argues that the U.S. economically is not a single country, but a collection of seven geographic nations and three quasi-independent city states. Kotkin lists the greater Miami area as one of the three city states, the greater New York City and Los Angeles areas being the other two, and predicts a Miami-area job growth of 9.8% from 2013-2023 to outpace the projected population growth of 3.8%.

        TechAmerica Foundation's Cybercities 2010 study reported that close to 7,000 high-tech establishments operate in the Miami/Ft. Lauderdale area with over 65,000 high-tech workers. Local organizations such as The LAB Miami, Miami Entrepreneurship Center, Venture Hive, and Refresh Miami provide support for startups and entrepreneurs by hosting lecture series and workshops and providing shared work spaces. The goals of these organizations are to provide these firms the tools they need to succeed and grow in the Miami area.

        On the education front, an abundance of students exists in the area. Between the University of Miami, Miami Dade College, and Florida International University (FIU), the Miami area boasts more than 240,000 college students. FIU is known for its large computer science program, as the college graduates the third highest amount of students with computer science degrees in the country. The city hopes that the emerging tech sector can help keep graduating students in the Miami area.

        In recent years, K-12 schools in the Miami area have shifted their attention and resources towards STEM (science, technology, engineering, and mathematics) programs with the goal of influencing students to get involved in these fields. Miami-Dade County Schools, the fifth largest school district by enrollment in U.S., hosts a yearly STEM expo as well as supports various STEM related competitions and events in conjunction with local organizations and colleges. The school district was awarded a $10.7M grant in 2013 to build two STEM high schools, one of which will focus on biotech. The end goal of getting students interested and involved in these fields and keeping them in the Miami area to help bolster the local tech sector and economy could become a reality in the near future.

        In addition to STEM school development, Florida is also home to University of Miami's Bascom Palmer Eye Institute which has contributed to some of the most vital advancements in the treatment of eye disease. The institute is pioneering the use of Avastin which can be used to treat macular degeneration and furthermore, the institute performed the first of its kind in corneal/ocular surgery for severe cases of eye disease.


The New Florida Polytechnic University
Florida Polytechnic University (Florida Poly) is the newest member of the State University system of Florida. In a skunkworks like process, similar to some new technology spin outs, the spin off of the school was originally 
conceived in secrecy.  The new school focuses on  STEM curriculum and opened its new campus in August of 2014 with a book-less library that has drawn national attention.  The first new building is 200,000 square feet of striking architectural design called the Innovation, Science and Technology Building.


All Aboard Florida $2.5 Billion Private High Speed Rail Plan 
All Aboard Florida is a new $2.5 billion high-speed private passenger railroad that will connect Orlando to Miami and South Florida.  Construction is commencing during the second half of 2014 and is expected to create 10,000 construction jobs. Historically, Orlando has been a major U.S. domestic destination and Miami has been a major International destination. Both areas should benefit from the integration of these destinations.  For example, a visitor to Disney World and/or Universal Studios could now schedule a trip to Miami to visit Art Basel, the boat show, or a medical convention.   


The Added Florida R&D Tax Benefit

        In early 2013, the State of Florida enacted a state R&D tax credit that allows corporations that qualify to receive up to 10% of qualified research expenses (QREs) incurred in the state that exceeds the firm's QRE average of the last four years. The funds are available on a first come, first serve basis, and the total pool of funds is $9 million per year.

        The state requires that the credit applicant be involved in a "target industry business." The Florida Business Resource for Business Development and Relocation lists the following categories as target industries:

Clean-tech

Life Sciences

Info-tech

Homeland Security / Defense

Marine Sciences

Materials Science

Automotive/Marine

Plastics and Rubber

Machine Tooling

Aviation / Aerospace 

Nanotechnology

Global Logistics

Financial / Professional Resources

Food and Beverage 

Call Centers / Shared Service Centers



Many startups moving into the greater Miami area are primed for the both the federal and Florida tax credits, as a large percentage of them are in a qualifying industry and meet the necessary criteria to receive the available incentives.



The Latin American Advantage

        In recent years, Latin America has seen tremendous growth in its tech sector and startup scene. Approximately 57% of the Latin American population is under 30 years old, with many in this group having regular access to the internet and social media. Latin America currently has 9% of the world's internet traffic, and it is estimated that the region will have nearly 300 million social media users by 2017. The increasingly tech savvy population has been a major contributor of growth in countries such as Brazil and Chile, which have their own ‘Silicon Valley' tech scenes with numerous technology giants, including Microsoft, Samsung, Oracle, IBM, Dell, and Motorola, opening centers in these hubs.

        Miami may be an ideal location for many Latin American entrepreneurs to expand or start their businesses. The Miami weather is similar to that of many Latin American countries, and close to 65% of Miami residents identify themselves as Hispanic/Latino. There is more financial capital per capita in Miami than any U.S. city, with a significant portion from Latin American firms and wealthy families that invest with Miami area banks and real estate. Miami has the potential to be the place where Latin American venture capitalists (VC) seek investment opportunities.

        Examples of Miami-based firms with ties to Latina America that have received substantial VC backing include:

  • Open English: an online English-language school that was founded in Venezuela (now based in Miami) has secured approximately $130M since 2008.

  • Admobilize: a Miami-based advertising science startup founded by Brazilian Rodolfo Saccoman has raised almost $3M and plans open a Brazil office in the near future.

  • Aplicor: a developer of CRM and ERP cloud software in early 2014 secured $2.8M in funding.

        A recent example of a Latin American firm shifting operations to Miami can be seen with YellowPepper, a Panama-founded mobile banking software developer with over 3.5 million users in nine countries. The firm, which has more than 70 employees, recently moved its operations to Miami and shortly thereafter received $15 million in venture funding.


Conclusion

        The Miami technology scene is steadily growing. Companies large and small are spending billions on research and development activities, making the both the federal and Florida R&D credits lucrative to pursue. Companies in technological industries creating highly innovative products and processes should be working closely with their tax professionals to build in documentation processes to their current R&D activities. Tax advisers involved with firms in the region should monitor these developments and assist their clients in obtaining R&D tax credits. The abundance in talent and both public and private support available should ensure that innovation will be coming out of this area for years to come.

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