The R&D Tax Aspects of Oklahoma Innovation



By , , and


Oklahoma-Innovation         Oklahoma’s neighboring states, namely Texas, get a lot of publicity for their lenient, business-friendly tax policies.  While bordering states continue to receive accolades from media and lawmakers, Oklahoma business has quietly flourished under recent tax policies.  Over the past 10 years personal income tax cuts have benefitted tax payers and the state government alike.   
        Despite many economists’ predictions, Oklahoma’s income tax cuts have increased tax collections.  Individuals account for 85% of Oklahoma’s small business owners and tax cuts on these individuals over the past 10 years has promoted tremendous growth in small business income.  In fact, Oklahoma’s small business income is growing twice as fast as the national average.   
        This growth is projected to continue with Oklahoma’s continued commitment to the reduction of personal income tax.  It is important for Oklahoma businesses of all sizes to capitalize on all available tax incentives, particularly the more lucrative ones such as state and federal Research and Development Tax Credits.  


The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 6.5 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 January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.


Oklahoma State Tax Incentives

        In addition to the federal R&D Tax Credit, eligible Oklahoma businesses can claim a state R&D tax credit.  While available R&D Tax Credits are excellent tax incentives, Oklahoma offers a number of other favorable tax incentives.  These incentives include: various Quality Jobs programs, Investment/New Jobs Tax Credit, Economic Development Pooled Financing and a Former Indian Lands Incentive and Tax Credit.  Although eligibility requirements for each of these incentives is dependent on a number of different variables, taking
advantage of these incentives can significantly reduce, and potentially eliminate, the tax liability of a company operating in Oklahoma.


Oklahoma State R&D Tax Credit

        The Oklahoma State R&D Tax Credit is calculated based on the number of computer services, data processing, or research and development employees hired by a company in a given fiscal year.  For each of these employees hired, the company is eligible for a $500 tax credit.  The employee must be paid at least $35,000 and be employed during the final quarter in the applicable tax year to qualify for the credit.  The credit is capped at 50 employees ($25,000) per year.


Quality Jobs Program

        Oklahoma’s Quality Jobs Program targets manufacturers and certain service industries.  The program offers a cash back incentive to companies that have a new payroll investment of $2.5 million or more.  This payroll investment threshold is $1.5 million for certain food processing and R&D projects or to firms located on certain former military bases.  For companies producing new direct jobs to the state that are greater than or equal to 1% of the total labor force of the county an even lower payroll threshold of $1 million is applicable.  The cash payment is up to 5% of new taxable payroll or 6% if at least 10% of a company’s workforce is veterans.  It is also required that qualifying companies meet the lower of the average county wage or the state index wage ($31,684).  These minimum wage requirements do not apply in the various Opportunity Zones throughout Oklahoma.  All business receiving the cash back incentive must also offer basic health coverage to all employees working 30 hours or more per week whose pay is included in the payroll figures for qualification.


Small Employer Quality Jobs Program

        Oklahoma’s Small Employer Quality Jobs Program gives qualifying enrolled companies cash rebates up to 5% of newly created taxable payroll for up to 7 years.  Like the Quality Jobs Program, this program targets manufacturers and certain service companies.  A qualified company can have no more than 90 employees and must create between 5-15 new jobs depending on the size of the population of the city where the project is to be located.  The same health care requirements apply for the Small Employer Quality Jobs Program that applied for the Quality Jobs Program.  Qualified companies must also pay employees included in the application an average of at least 110% of the average county wage where the project is located.  Applicants in economically challenged counties may qualify at an average of 100% of the county average.  


21st Century Quality Jobs Program

        21st Century Quality Jobs Program was passed in 2009 and rewards businesses with a highly skilled, knowledge-based workforce.  The goal of the program is to promote impactful high wage jobs without competing with existing incentives.  Qualifying companies may be eligible for up to twice the Net Benefit rate of the Quality Jobs program, i.e. 10% of taxable payroll for eligible new jobs.  The 21st Century Quality Job Program lasts up to 10 years.  Qualifying companies must create a minimum of 10 New Direct Jobs and employees in these jobs must work 30 or more hours per week.  The average wage requirement for the New Direct Jobs is greater than or equal to 300% of the average county wage which does not exceed a state wage index calculated at $94,000 for the program in 2013.  


Investment/New Jobs Tax Credit Package

        Manufacturers in the state of Oklahoma can claim a New Jobs Credit for based on the number of new employees hired in a specific tax year.  For each new manufacturing employee hired with wages above $7,000 for the applicable tax year, a company is eligible for a $500 tax credit.  If the new employee is working in a manufacturing facility located in an Oklahoma enterprise zone, the credit per new employee increases to $1,000.  The Investment Tax Credit is available for companies with at least $50,000 worth of investments in depreciable property placed in service in the applicable tax year.  The depreciable property must be used in manufacturing, or in a web search portal establishment, and the investment cannot come as a direct result of a decrease in the number of employees.  The credit totals 1% of the qualified investment and doubles if the business is located in an Oklahoma enterprise zone or if the investment exceeds $40 million.  A company must choose between New Jobs or Investment Tax Credit and cannot receive both.  


Federal American Indian Lands Incentives

        The revenue Reconciliation Act of 1993 provided for substantial tax incentives based on certain business activity within Indian reservations.  The incentives passed were an employment tax credit for employers of certain enrolled tribal members and their spouses who work within an Indian reservation and an accelerated depreciation allowance for certain business property used within an Indian reservation. Although the American Indian Lands Tax Credit is one of many tax incentives expired as of December 31, 2013 that is awaiting extension by Congress, eligible Oklahoma businesses should amend past year’s returns and/or monitor the status of the expired credit.   Oklahoma has the largest percentage of American Indian population in the country and roughly two-thirds of Oklahoma qualifies for the federal accelerated depreciation allowance, which results in savings of up to 40%.


Oklahoma State University Incubator

        The Riata Center of Entrepreneurship and the Spears School of Business at Oklahoma State University operate one of the most successful student business incubators in Oklahoma, the Student Startup Council.  In 2014 the Student Startup Council was awarded the Incubator of the Year at the Small Business Awards in Oklahoma.  The council accommodates students at different stages of entrepreneurship and offers students with early business concepts assistance.  Sponsors also fund cash prize incentives for annual competitions within the incubator.  In addition to the Riata New venture Incubator, which helps students who have already launched a business, the hatchery program helps students who are still in the development and planning stages of creating their business.


Conclusion

        It is important that businesses operating in Oklahoma capitalize on all state and federal tax incentives in which they are entitled.  As Oklahoma continues to adopt more lenient tax policies, companies should take advantage of the numerous incentives that follow.  The incentives mentioned in this article, especially the federal and Oklahoma R&D tax credits, can reduce, and even eliminate, the taxes owed by eligible companies.  Additional incentives such as Economic Development Pooled Financing and the Aerospace Engineer Workforce tax Credit are also available for Oklahoma companies.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Charles G Goulding is the Manager of R&D Tax Savers.

Sean Brophy is a Tax Analyst with R&D Tax Savers.


Similar Articles