Research and development
(R&D) plays an essential role in innovation by bringing ideas to
the market, promoting economic growth, creating jobs, and keeping Ohio
The present article will discuss
the R&D tax credit opportunity available for innovative companies
The R&D Tax Credit
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
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 payroll taxes.
State R&D Tax Credit
In July 2008, the State of Ohio
established a credit for Qualified Research Expenses. The Research and
Development Investment Tax Credit provides a nonrefundable tax credit
which can be taken to offset Commercial Activity Tax (CAT)
liability. The Ohio credit is designed to encourage Ohio's
corporations to invest in increased Research and Development
activities. The implementation of this R&D Investment Tax Credit
ensures that innovative businesses are rewarded for initiating new
R&D projects and enabled others to continue budgeting ahead for
long-term R&D projects.
Authorized by Ohio Code Section
5751.51, the Ohio R&D tax credit is a nonrefundable tax credit of
7% of Qualifying Research Expenses in excess of the taxpayer's average
investment in Qualifying Research Expenses over the past three years on
in-house and contractual R&D performed in Ohio. Using the
federal definition to determine qualifying research expenditures,
businesses calculate their credit based on their average expenditure on
R&D for the latest three tax years. Excess credit not used in the
taxable year in which it is earned may be carried forward for up to
seven years. The R&D tax credit is an effective way to
support research and development, which plays a critical role in any
The Ohio R&D Tax Credit
equals seven percent of the amount of Qualified Research Expenses in
excess of the taxpayer's average investment in Qualifying Research
Expenses over the three preceding taxable years. A sample
calculation is included below:
Sample Ohio R&D Tax Credit
Investment in QREs for
Avg. Investment in
QREs for 3 Prev. Years
Net Excess of QREs for
Credit Earned (7%)
The Ohio R&D Credit is
nonrefundable. As such, if a business generates more R&D
credit than its CAT liability for that year, the excess credit amount
must be "carried forward" to future tax years. This "carry
forward" can occur for up to seven (7) years from when the R&D
Credit was generated. There is no special application and/or
approval process for the Ohio R&D Credit.
Ohio Third Frontier Initiative
Third Frontier is a state-wide initiative committed to transforming the
growth of startup and early stage technology companies.
Businesses and entrepreneurs have access to a statewide network of
resources through this nationally-recognized initiative to help turn
great ideas into thriving companies and paying jobs.
Created in 2002, the Ohio Third
Frontier is an unprecedented commitment to create new technology-based
products, companies, industries and jobs. The $2.3 billion initiative
supports applied research and commercialization, entrepreneurial
assistance, early-stage capital formation, and expansion of a skilled
talent pool that can support technology-based economic growth. The Ohio
Third Frontier’s strategic intent is to create an “innovation
ecosystem” that supports the efficient and seamless transition of great
ideas from the laboratory to the marketplace.
The investment of Ohio Third
Frontier resources is guided by the following strategic goals: In
targeted areas of technology, the Ohio Third Frontier seeks to support
the growth of existing and emerging industry clusters by:
Increasing the quantity of high-quality
research that has commercial relevance to Ohio companies.
Expanding access and availability of
investment capital to create, grow, and attract technology-based
Growing and nurturing an increasingly
experienced pool of entrepreneurial management talent.
Addressing the technical needs of
existing companies pursuing new products and production.
Contributing to the expansion of a
technologically proficient workforce.
The Ohio Third Frontier supports
a comprehensive portfolio of program activities that include:
Value Chain Development Advanced
Energy Program: The Value Chain Development Advanced Energy
Program supports R&D that addresses the technical and cost barriers
to commercialization in Ohio of advanced energy components and systems,
with preference to wind, biomass, and energy storage.
Advanced Materials Program: The
Advanced Materials Program supports R&D that addresses the
technical and cost barriers to commercialization in Ohio of advanced
materials products with preference to polymer and carbon nanomaterials,
liquid crystals, and bio-based materials.
Biomedical Program: The
Biomedical Program supports R&D that addresses the technical and
cost barriers to commercialization in Ohio of biomedical products, with
preference to cardiovascular , regenerative medicine , and orthopedics.
Fuel Cell Program:The Fuel Cell Program supports
R&D that addresses the technical and cost barriers to
commercialization in Ohio of fuel cell and other advanced energy
components and systems.
Innovation Ohio Loan Fund: The
Innovation Ohio Loan Fund assists Ohio companies in developing next
generation products and services in targeted industry sectors by
financing the acquisition, construction, and related costs of
technology, facilities, and equipment.
Medical Imaging Program: The
Medical Imaging Program supports research and development that
addresses the technical and cost barriers to commercialization in Ohio
of medical imaging components and systems.
Ohio Research Commercialization Grant
Program: The Ohio Research Commercialization Grant Program
supports accelerated Ohio commercialization by small companies awarded
selected federal R&D funding.
Photovoltaic Program: The
Photovoltaic Program supports R&D that addresses the technical and
cost barriers to commercialization in Ohio of photovoltaic components
The project listed below provides
an example of the R&D efforts that have been supported and grown
through the Third Frontier Initiative.
STACK Construction Technologies
most new construction, there is often a lengthy bidding process that
occurs before groundbreaking begins. Commercial building trade
contractors rely on successful bids to secure jobs. The existing
process requires them to download hundreds of blueprints each month and
often print massive amounts of documentation prior to measuring and
counting. To improve this process, STACK Construction
Technologies of Mason, Ohio is developing software solutions to address
Specifically, STACK has developed
software to measure and count using digital files online without having
to download them first. This platform enables the viewer to
access fifteen to twenty blueprints at a time on a single screen.
Traditionally, a contractor would have to go to each individual
project's website and assimilate the blueprints and drawings.
STACK's program consolidates the necessary data so that contractors can
navigate and evaluate many different projects at once. Once trade
contractors have selected the blueprints that they require, the STACK
Takeoff program allows them to color-code the blueprints within the web
browser, simulating the use of colored pencils on a traditional paper
blueprint. The program also automatically calculates the area,
distance, and volume of the construction. Once this process is
complete, the STACK Estimating tool then tells contractors how much of
each material that will be required in order to provide an accurate
estimation for project costs. This tool is essential for
contractors to complete estimates with sustainable profit margins
There are currently 26 employees
at STACK, a number that is expected to double in the near future as
STACK continues to invest in R&D projects to develop new software
and improve the performance of its existing offerings. STACK and its
software development projects are prime examples of R&D efforts
that could generate Qualified Research Expenses which are eligible for
the Ohio R&D Tax Credit.
and innovation encourages continual economic growth in Ohio. There are
many R&D tax credit opportunities available for innovative
companies in Ohio. The new payroll tax credit aspect of the
R&D Credit will significantly benefit many start-ups and small to
mid-sized businesses. Specifically, the R&D credit has now
been expanded to apply credits in excess of income taxes to FICA tax
liability, even if a company was unprofitable and had no tax
liability. Taxpayers should be aware of federal and state tax
incentives which are available to them to help shoulder the costs of