The R&D Tax Credit Aspects of New York City



By , , and


New-York-City
        New York City’s economy is in the midst of a rapid transformation.  The high-tech industry is the fastest growing sector in terms of economic output.  Big data, smart phones, social media, and artificial intelligence have sparked a wave of innovation that is creating a number of new startups and is re-inventing New York City’s traditional industries.   The city is home to some of the nation's fastest growing tech sectors.  Indeed, it has surpassed Boston as the number two hub, only second to Silicon Valley.

        Traditional NYC industries such as advertising, fashion, and financial services are becoming increasingly tech oriented.  Advances in computer science, automation, and technology in general will propel the city to new limits and unexplored frontiers.  Innovative NYC companies have large teams of computer scientists and engineers constantly developing new technologies. Federal and state research and development tax credits are available to stimulate these efforts.


The 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.


The New York City Tech Ecosystem

        The tech industry in NYC is booming.  HR&A Advisors, a leading real estate, economic development, and energy-efficiency advisory firm based in New York City recently conducted a study of the technological economic opportunities for New York.  The following are some of the NYC tech ecosystem research findings: 
 
  • There are 291,000 tech jobs in the NYC ecosystem. This is an impressive 7% of the 4.27 million people working in NYC.  The retail sector employs 354,000 people or 8% of total workers, while healthcare employs 665,000 people or 16% of total workers.

  • The NYC tech ecosystem generates approximately 541,000 total jobs, which is 12.6% of total NYC employment.

  • From 2003 to 2013, the New York City tech ecosystem added 45,000 jobs, growing faster than both total New York City employment and total U.S. employment.  This represents an increase of 18%.

  • The NYC tech ecosystem generates over $5.6 billion in annual tax revenues to the City. That represents 12.3% of the City's 2013 tax revenue.

  • Workers in the tech ecosystem earn 49 percent more than the average City-wide hourly wage.

  • Jobs in the tech ecosystem that do not require Bachelor's degrees pay 45 percent more in hourly wages than jobs with the same educational requirements in other industries.

         These findings lay out the growing importance of the tech industry on NYC’s broader economy.  Andrew Rasiej, Chairman of the 38,000 member NY Tech Meetup had this to say about the figures:

        "This groundbreaking study confirms once and for all that technology can no longer simply be considered just 'a slice' of the economic pie, but rather 'the pan' that is supporting the dramatic and dynamic transformation of all of New York City's core industries as they fight to compete in the hyper-connected 21st century global economy.”   

        New York State has offered technology companies millions of dollars in tax breaks in recent months, a practice that Albany officials say encourages job creation.

        Part of the reason why leaders are so eager to keep tech companies in New York is because they realize the profound effects that the tech industry will have on NYC’s core industries.  The finance industry for example is becoming increasingly intermeddled with the technology industry.


Tech and Finance

        Tech and finance are becoming increasingly intertwined.  Of the 4.27 million people working in New York City, 21% work in professional services, information, finance, and insurance sectors.  63% of the 291,000 workers in the NYC tech ecosystem work technology jobs in these sectors.  The tech ecosystem’s dominance of these key sectors demonstrates the vital role technology plays in supporting the business and operations of firms within these traditionally strong sectors of the NYC economy.

        MasterCard has recognized the intermeddling of the two industries.  That company is one of several big-name financial services firms that are opting to set up tech divisions in Manhattan separate from their headquarters.  Some of these service firms are even beginning to view themselves as technology companies. 

        Kim Slate, head of MasterCard’s emerging payments technology group, had this to say about the importance of technology in the modern finance industry:

        “We’re seeing this huge digital shift.  In the next five years you will see more change in payments [than in] the previous 50.  We need to think differently, design products differently [and] design products faster than ever.” 
        
  
Tumblr, Inc.
        Tumblr, the social networking and microblogging platform, has its headquarters on East 21 Street.  The 2007 start-up sold for $1.1 billion to Yahoo! in May 2013.  Tumblr has an audience of over 420 million and registered blogs of over 206 million.

Etsy, Inc.
        Etsy, the 2005, Brooklyn start-up, has a mission to reinvent commerce in ways that build a more fulfilling experience.  The vintage, handmade online marketplace connects people from around the world, to make, sell, and buy unique goods.  A recent survey of Etsy sellers across the nation suggests that nearly half are independent workers, and nearly 90% are female. Over the last year alone, Etsy has facilitated over $1.35 billion in sales.

ZocDoc, Inc.
        ZocDoc, headquartered in Greenwich Village, is a platform for finding and booking appointments with doctors. The 2007 start-up has innovated the way doctors and patients interact and improved the healthcare experience by eliminating market inefficiencies.  “We’re one of the companies that can help fix the health care system,” said Dr. Kharraz, a physician and ZocDoc’s COO. “We’re making doctors more efficient and helping patients find the hidden supply of healthcare.” That hidden supply, he explained, is the 10-20% of appointments that are made and then cancelled within one to two days of the appointment date.    


Advertising Science Industry

        New York City is the place to be for ad tech companies.  Google, the internet advertising giant has over 3,000 employees in the former Port Authority building on Eighth Avenue.  Smaller businesses are grabbing at the expanding market as well. John Elton, a partner at venture firm Greycroft Partners, which has bankrolled more than 100 startups, nearly 30% of them in New York, had this to say about technology working its way through NYC’s key industries, "It's a great place to build companies that are going to disrupt some of those industries."

        Ad tech firms are reaping profits from a broad range of NYC clientele.  They generate the majority of their revenues selling ad space and campaigns to marketers from all industries including the traditional NYC economic anchors such as finance, fashion, and real estate. 

        However, even these traditionally low-tech industries are being forced to innovate.  Financial service companies, for example, have encountered a new climate demanding active responses to market changes following the Great Recession. This has prompted a push towards modernization of systems and adoption of more agile principles of business.  

        Charles Schwab, for example, recently released Schwab Intelligent Portfolios which provides a fully automated investment advisory service for a fraction of the price and includes traditional investment services.  Small investors with as little as $5,000 will now be able to open IRA’s and revocable living trust accounts and gain as much in returns as a human advisor. 

        IBM’s Agilysis Stratton Warren (SWS) software is another innovative example.  Named after superstar investor Warren Buffet, it uses search engine technology to generate  responses to detailed questions such as “What happens to the share prices of energy companies when oil trades above $100 a barrel, political unrest has recently occurred in the middle east, and inflation runs rampant in Russia?”   Search engine technology allows the computer to sort through a storage of big data in order to answer questions.  Similar search engine technology is infiltrating other industries as well. 

        Some commentators refer to the expansion of search technologies in all industries as Googlization. NYC is currently experiencing this phenomenon as it shifts from a primarily financial industry based economy to a more balanced, technology driven economy.


Conclusion

        New York City’s tech industry is a fast growing sector.  Big data, smart phones, social media, and artificial intelligence have sparked a wave of innovation that is creating a number of new start ups and re-inventing New York City’s traditional industries.  Federal and state R&D tax credits are available to support and stimulate companies performing innovation in the New York City area.

Article Citation List