The R&D Tax Credit Aspects of Pennsylvania



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Pennsylvania
        Pennsylvania has a large and diverse economy.  Like most modern economies, it is driven in large part by technological innovation. In 2014, the state had real Gross State Product (GSP) of over $609 billion, which made it sixth in country for GSP. PA has a range of innovative industries that drive production, including pharmaceuticals, agriculture, natural resources, appliances and food production.  

        Innovative PA companies in these and other industries are investing substantially in the state economy by expanding thier operations.   For example, Reynolds & Reynolds Electronics Inc., in Allentown PA, started operations in 1989 and has since grown to become a leading elevator supply company. KCF Technologies which has headquarters at Penn State and specializes in innovative technology solutions was founded in 2000 by three researchers from the University.  Since 2005 revenue at the company has grown over 500%, an average of over 60% each year.  

        Companies such as these that develop products and services should be aware of federal and state R&D tax credits, which are available to help stimulate innovation.


The Research & Development Tax Credit


        To date, over 765 Pennsylvania companies are utilizing federal and Pennsylvania R&D tax credits.


        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.

Pennsylvania R&D Tax Credit


        The Pennsylvania State Research & Development Tax Credit largely mirrors the Federal Research & Development Tax credit discussed above.  Typical qualified expenses include the following:


  • Wages paid to employees for qualified research services
  • Cost of supplies used directly in research activities
  • 65% of amounts paid to others for contracted research

        The State of Pennsylvania is very transparent and annually publishes a detailed report including company name, industry and amount of state R&D Tax Credit. The table below lists the top ten companies that were awarded an R&D credit last year:


Taxpayer Name 2014 Credit Awarded
Teva Branded Pharmaceutical Products R&D Inc. $6,389,351
GlaxoSmithKline, LLC $3,353,317
PGG Industries $2,389,498
Janssen Research & Development  $2,207,905
Seneca Resources Corporation $1,395,095
Novartis Pharmaceuticals Corporation $1,144,884
Mack Trucks $1,000,321
Sanofi Pasteur, Inc. $957,730
Shire Holding, Inc. $914,646
CNH Industrial America, LLC $897,163


        Besides the companies listed in the table above, an additional 755 taxpayers claimed the tax credit in 2014.  Of the total 765 taxpayers claiming the credit, all of them were awarded it.  Even some of these companies who were not profitable benefitted from the credit, thanks to the feature of the Pennsylvania state tax credit that gives the ability to sell unused tax credits to others.  This method is especially beneficial for small businesses that incur research expenses but have no tax liability to offset. 

        Pennsylvania recognizes the importance of innovation in businesses of all sizes.  The chart below demonstrates the break-up of the awarded credits between small and non-small businesses.  Small businesses are those with net book asset values of less than $5 million.


Business Size Number of Applicants  Percent of Applicants Tentative Credit Amount Actual Credit Amount
Percent of Actual Credit
Small 332 43.4% $10,801,091 $10,801,091 19.6%
Not Small
433 56.6% $76,710,340 $44,198,909 80.4%
Total 765 100% $87,511,431 $55,000,000 100%



Economy


        As discussed briefly above, Pennsylvania is a large and growing economy.  The $609 billion of GSP in 2014 amounts to more economic output than most countries in the world.  In fact, if the state were an independent country it would be roughly the 18th-20th largest economy in the world in terms of economic output.    


        Business investments in the state have been very strong over the past few years. Capital spending in large metro areas is diverse and is beginning to generate an increasing number of jobs. General Electric announced in November 2014 that it will build a new manufacturing facility to drive innovation and implementation of advanced manufacturing technologies.  

        The new facility will cost about $32 million over the course of three years and will result in the creation of 50 high-tech engineering jobs. It reflects GE’s belief that the intersection of technology and manufacturing is bringing a new era of manufacturing to the 21st century.  That vision includes digital fabrication technology, lean manufacturing methods, supply chain efficiency and advanced materials sciences.  

        Dan Heintzelman, GE vice chairman had this to say about the emerging industry and the new facility:

         “Advanced manufacturing is driving a profound change in industry and at GE.  It is how we will compete and win in the future. We can more efficiently invent and build products for our customers, while driving better margins for our investors. This new facility is crucial for bringing advanced manufacturing technology to all our businesses.”  

        General Electric is not the only company in PA investing in innovation. Comcast has decided to expand its global headquarters with a 59 story, $1.2 billion skyscraper in Philadelphia. The Comcast Innovation and Technology Center contains 1.285 million rentable square feet of office space, 230,112 square feet of hotel space and 2,682 rentable square feet of retail space, and the building is currently seeking LEED Platinum certification from the U.S. Green Building Council .  

        Perhaps the most promising growth in the state comes from the natural gas industry.  Several major pipelines and petrochemical facilities are currently under construction, and the state is also working to increase exports of natural gas liquids. Sunoco Logistics Partners LP announced last November that it will invest nearly $2.5 billion in a pipeline to transport natural gas liquids from the Marcellus and Utica Shale in western Pennsylvania to the Marcus Hook Industrial complex along the Delaware River just outside of Delaware.


Natural Gas Innovation


        Over the past few decades innovators have transformed the oil and natural gas industry into one of the most technologically advanced industries in the nation.  Innovative technologies in the industry involve making the exploration and production of natural gas more safe, efficient and environmentally friendly.  New technologies allow producers to use fewer explosives, which reduces the impact of exploration on the environment.  


        Seismic imaging uses state of the art computers to create 3-dimensional models of subsurface layers.  4-D seismic technology is even more innovative.  It allows exploration teams to observe how subsurface characteristics have changed in a certain region over time.  These x-ray-like technologies allow developers to identify drilling sites easier while causing less harm to the environment by placing drilling holes in the optimal position.  What’s more is that labor costs are greatly reduced, in turn reducing the cost of the final product for consumers.  

        Coil tubing is a technology that is used in creating drill pipes.  As opposed to the traditional rigid drill pipe, it involves a long, flexible coiled pipe string.  This method reduces not only the environmental footprint of drilling operations, but also the cost.  

        4-D seismic imaging and coil tubing are just two examples of innovation in the natural gas industry.  Corporations, government agencies, academics and private research and development firms are all developing new technologies to improve efficiency of exploration and production operations and reduce the environmental footprint from them.


Pharmaceuticals & Biotech


        Many people see Pharmaceuticals and Biotechnology as two possible engines that will power Pennsylvania’s economy through the 21st century.  The State is home to a large number of key players in both industries who have substantial operations there.  Pfizer has a small molecules, vaccines and biologics division in Collegeville, PA; GlaxoSmithKline has a similar division in Conshohocken, PA;  Merck has one in Lansdale, PA; Alliance Pharma does contract research & consulting in Malvern and Novum has a clinical research center in Pittsburg.  These firms are just a tiny fraction of the Pharmaceutical and Biotech firms who have Research and Development operations in the state.  



Warehouses


        The warehouse industry in Pennsylvania is a robust one.  Eastern Pennsylvania has an extensive highway and railway network as well as access to several busy Northeast markets.  Forever 21, Nordstrom and Urban Outfitters are all building large, new e-commerce fulfillment centers in Lancaster County.  The three centers will employ a total of 1,100 workers year round and many more during the holiday season. 


        Even the warehouse industry has opportunities for Research and Development.  Robotic automation has entered warehouses, and it is on the brink of revolutionizing the industry.  Robot prices are falling fast, and technology is allowing them to become more and more capable of warehouse tasks such as picking, packing and transport. Throughout the nation, a growing number of companies are turning to robotic warehouse automation as a means to reduce costs and complexities associated with handling materials.

        Warehouse robots are taking over dull, repetitive tasks, and freeing up people to perform more value added work.  They streamline the complex logistics of material handling, dramatically increasing overall output. Robotics companies developing new and improved warehouse solutions as well as manufacturers, retailers, and distributors implementing robotic warehouse automation should be aware of R&D Tax Credits as these activities are often eligible for a large tax benefit .  


Agriculture & Food Production


        Pennsylvania farms produce more than $7 billion in crops each year. The total value of food products produced in the state amounts to a $30 billion industry. 2014 saw increased investment in a number of areas, including the state’s dairy and apple industries.  Farmers and food producers are developing new and innovative techniques and processes to boost productivity and save money.


        In the agriculture industry, agrobots are automating the process of picking small produce products like strawberries. Such tasks have long required the backbreaking efforts of tens of thousands of low-paid workers.  However, recent labor shortages in the industry have forced farmers to start rethinking the way the pick the berries.  “It’s no longer a problem of how much does a strawberry harvester cost,” said Juan Bravo, inventor of Agrobot, the picking machine. “Now it’s about how much does it cost to leave a field unpicked, and that’s a lot more expensive .”  Even though the machine costs about $100,000 it would still be profitable for farmers because it saves them the expense of leaving their patches unpicked when they cannot find workers.

        Agrobots are not the only innovations in farming technology.  Crop protection, irrigation, nitrogen use efficiency, no-till farming, water harvesting and precision agriculture all involve substantial research and development.

        Consumer demand is also driving innovation on the production side of the food industry.  Meaningful changes in core ingredients for food products require laboratory activity because consumers are demanding healthier products that still taste the same as their less healthy counterparts. Large food manufacturers have huge contingents of chemists, scientists, and nutritionists constantly seeking solutions to concerns created by emerging health awareness.  

        The major challenge for food producers is creating a product that tastes good but is healthy at the same time.  In 2011, for example, General Mills spent $235 million dollars on research and development .  The industry giant is competing with other producers on price, nutrition, shelf-life length, taste, texture and consistency.  Developing a food product that meets these standards involves a deep process of experimentation, which can be costly.
 

University of Pittsburg


        In addition to industry, PA’s advanced academia is also conducting substantial research and development. In 2014, the University of Pittsburg received $697.6 million in research funding. Researchers and engineers there are using this funding to develop a diverse array of technologies which include the following:


  • Dental bone-grafting technology designed to improve bone healing
  • Augmented reality medical simulation systems for training healthcare workers
  • Mattress overlay technology designed to alter the skin temperature of the person sleeping on the mattress (A technique used for treating and preventing certain medical conditions).
  • Computer software designed to help students write better
  • Motion analytical technology that allows user to analyze their baseball swing
  • Smart phone application software that improves awareness for smokers who wish to regulate their smoking patterns.  

        Many of these technologies created at the University and listed above have vast startup potential.  UPitt’s research center has an enterprise development team that caters to local entrepreneurs interested in starting new companies around innovation that emerges from the center.  In 2014, the University launched 6 companies around innovation developed in the University labs. They are listed below:


  • Western Oncolytics, Ltd.
  • Diamond Kinetics, Inc.
  • Nanovision Diagnostics, Inc.
  • Peptilogics, Inc. UbiCue, Inc.
  • Sofregen Medical, Inc.

        The same services offered to potential start-ups are also available for venture capitalists looking for new opportunities . The Pitt Ventures initiative provides a systematic roadmap for successfully translating early-stage intellectual value into products, services and, ultimately, new enterprises that create jobs, wealth and tax revenue.  


Carnegie Mellon University

       
        Carnegie Mellon University (CMU) is an extremely well recognized, world class research institution .  For the 2014-2015 year, the Times Higher Education of London ranked CMU No. 24 in the world, and No. 17 among U.S. universities.


        CMU’s research institution has staff in a range of fields from computing to environmental technology to robotics to biotechnology. The University is particularly well known for its Robotics Institute which has developed a significant number of robotics technologies such as drones, automated cars, space-bots and industry robots.  

        Like many modern research institutions, the University is striving to bring innovative ideas developed in the labs to market.  It is one of 25 universities in the world that annually join the World Economic Forum’s “Global University Leaders Forum.”   At the forum, the world’s top 1,000 companies gather to shape global, regional and industrial agendas.  


Conclusion


        Pennsylvania has a large and diverse economy that is driven by technological innovation.  Companies in the state are investing lots of money into improving products, reducing costs and minimizing environmental footprints.  These investments are likely making them entitled to federal and state R&D tax credits.


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