The R&D Tax Credit Aspects of Innovation in Michigan



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Michigan
        After a few, somewhat rocky years, the Michigan economy is on an upward trajectory being buoyed by innovation and technological creativity within all business sectors.  In the past few years, nearly every sector of Michigan’s economy has seen significant growth, resulting in over 350,000 new jobs since 2009 and about 60,000 in 2014 alone, according to numbers from the Bureau of Labor Statistics.    

        Growing sectors in the state’s economy include manufacturing, agriculture, mining, fishing, and professional services.  Manufacturing is a particularly innovative industry were successful entrepreneurs rely on new product development and innovative process improvements to gain a competitive edge.  

        In agriculture, the growing worldwide population means innovators must constantly develop creative techniques to combat disease and increase production output while using less land, water, and natural resources.   Mining innovations involve smart exploration, more efficient mining and safer working conditions.

        In the fishing community, commercial innovation involves data improvement, electronic monitoring, state-of-the-art fishing gear and new tools for monitoring the environment.   

        In the service sector, innovation involves increasingly smart analytical software and data management capabilities.  All of these sectors have the common focus of a commitment to innovation.  Federal and state research and development tax credits are available to help support and stimulate those conducting R&D or incurring expenses on innovative pursuits.


The Federal R&D 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 19, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year. As of this writing, proposed tax extender legislation would extend the tax credit through December 31, 2016.


Manufacturing

        Manufacturing is perhaps the most innovative of all business sectors in Michigan.  Historically, this sector claims the most R&D tax credits nationwide.  On a state level, the industry accounts for 30% of Michigan's total gross state product (GSP), more than twice as much as any other sector. The state ranks first in the nation in the rate of job growth in the manufacturing sector since 2009, more than twice as fast as the second-ranked state of Indiana.   Automobile manufacturing is of course the largest contributor to the sector, accounting for about half of total manufacturing output however, other manufacturers are significant as well.

        Production of machinery (computers, machine parts, engines, valves, conveyors, tools, and pumps) are next in line in terms of total output. Fabricated metal products (cutlery, hand tools, hardware) rank third in Michigan. The state is also among the leading states in the manufacture of sporting goods and athletic equipment.  Innovations in this sector involve new product developments and more efficient production processes.  Expenses incurred on these activities are often R&D credit eligible.


Agriculture

        Agriculture accounts for a significant portion of total GSP in Michigan.  About twenty five percent of Michigan's agricultural revenues are generated by dairy products, mostly milk and cheese.   The output in the state is so large that it ranks number two in the nation for dairy products even though it is geographically much smaller than some other larger states, hence the nickname, “cheese heads”.

        Innovations in this sector involve improving food production’s environmental footprint, incorporating smart tools to monitor and analyze the supply chain, anaerobic digesters that can turn manure and food waste into energy, increasing the health and nutrition of cattle, and the use of drones for collecting data on crop and feed development to maximize water and nutrient usage.  


Mining

        Although mining contributes less to GSP than agriculture or manufacturing, Michigan still has significant mining operations, mainly of iron ore, cement, sand, and gravel. In addition, the state is a leading producer of peat, bromine, calcium-magnesium chloride, gypsum, and magnesium compounds.  Mining has always been an innovative industry.  Typical challenges involve creating better efficiency, safer working environments, and containing environmental risks.  

        On a more specific level, innovations generally involve signal processing, aerospace technology, communications, and the discovery of new materials.  The world of mining, like any other industry, however does not exist in a vacuum.  Innovations are often developed in other industries and later developed to contain certain applications geared toward mining.

        Modern mines are almost completely mechanized and each operation involves a different technical solution.  New technologies are constantly being developed from the blasting process through extraction to environmental rehabilitation.  


Fishing

        Fishing is a thriving industry in Michigan.  Most of the catch there is taken from the Great Lakes and usually includes catfish, chubs, lake herring, lake trout, salmon, whitefish and yellow perch.  

        Innovations in the commercial fishing industry involve new data collection and reporting systems, tools to assist with the sustainability of fisheries, innovative fishing gear, electronic at-sea monitoring, and new fishing net designs that can actually weed out undesired catch.   


Services

        In addition to some of the other growing sectors listed above, Michigan has seen significant growth in the professional and business services industry.  Community, business, and personal services (private health care, law offices, engineering, research companies, repair shops, computer software companies, etc.) are the leading service industry in Michigan.  Ranking second is the wholesale (automobiles, automobile parts, groceries, machinery) and retail (automobile dealerships, discount stores, grocery stores, restaurants) trade sector. Michigan's third-ranking service industry is finance, real estate and insurance.   Finally, there has also been significant growth in industries such as education, health services, leisure and hospitality.

        Innovations in the service sector involve the use of intelligent software, big data analytics, cyber security, and data management systems.  Innovations such as these have contributed significantly to Michigan’s high ranking in the professional and business services sectors when compared with the rest of the nation.  The hiring of engineers, consultants, management, and temporary workers by firms in the growing manufacturing industry has also contributed significantly to Michigan’s success in this sector. While Michigan ranks fifth in percent growth in this industry, the 57,200 jobs gained since 2009 lag only to California and Texas.


Innovation District

        Mayor of Detroit, Mike Duggan, announced last year, an initiative to build a new innovation district that  will promote small business growth and create jobs throughout Detroit.  Duggan states, “The focus of the Innovation District will be to create an anchor to support neighborhood business incubators across the city”.  

        Officials say it will encompass downtown, midtown, and stretch from East to West roughly from I-75 to Woodward Avenue, and North to South from Grand Boulevard to the Detroit riverfront.  That space encompasses a roughly 4.3 square mile area that already hold about 55 percent of the city’s jobs. 

        The initiative is in line with many of the economic strategies in regions across the country.  Innovation is generally the backbone of meaningful economic growth.  Recently, however there has been a growing consensus about the importance of collaboration between businesses, government, and academia in their pursuits of innovation.  Bruce Katz, Vice President of Brookings Institution has co-authored a report outlining how innovation districts can support economies,  stating,  “What’s going to happen is we’re going to have a two-plus-two-equals-five effect”... “Collaboration and synergy in this district are going to have unanticipated discoveries for the market.”


Conclusion

        The Michigan economy is increasingly innovating.  Growing sectors in the state’s economy include manufacturing, agriculture, mining, fishing and professional services.  Federal and state Research and Development Tax Credits are available to help support and stimulate innovation efforts in the state of Michigan.  

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