The R&D Tax Credit Aspects of South Carolina
South-Carolina
Manufacturing in South Carolina has long
been a central anchor to the local economy. With
innovative giants like Boeing and BMW, airplane and automotive
manufacturing provide support to a broad range of
sub-contractors and parts manufacturers in the state.
Like any manufacturing economy, research and development is
crucial to economic expansion. Federal and state R&D
tax credits are available to stimulate the effort.
The present article will discuss South Carolina’s most
innovative industries and present the federal and state tax
credits available to support ongoing R&D efforts.
The Research &
Development 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 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 $250,000 per year in payroll taxes.
South Carolina R&D
Credit
To reward companies for increasing research
and development activities in a taxable year, South Carolina
offers a credit equal to 5% of the taxpayer’s qualified
research expenses in the state. The term “qualified research
expenses” for state purposes is consistent with that of the
federal as defined in Section 41 of the Internal Revenue
Code. The credit taken in any one taxable year may not
exceed 50% of the company’s remaining tax liability after all
other credits have been applied. Any unused portion of
the credit can be carried forward for 10 years from the date
of the qualified expenditure.
Manufacturing
In South Carolina, exports were up over $25
billion throughout 2012, and are expected to rise again
pending 2013 reports. Much of these exports can be
attributed to not only large manufacturers like BMW and
Boeing, but also the wide array of subcontractors and smaller
manufacturers which they support. BMW’s
Spartanburg factory currently manufactures 300,000 cars a
year, and exports 70% of U.S. production. Still, the
plant shows no signs of peaking production anytime soon.
The German automaker recently announced a decision to invest
$1 billion in the facility and hire an additional 800 workers,
making it the company’s largest factory in the world.
Innovative parts producers such as Bosh, Dayco and JTEKT
directly benefit from the continuous expansions and currently
produce innovative products to meet the demand. Boeing,
in S.C. continues to expand its operations there with its
final assembly plant for the 787 Dreamliner and its plans to
construct two separate research and development facilities in
2015. Like the benefit the BMW plant provides, a wide array of
innovative aerospace sub-contractors directly benefit from the
expansions.
South Carolina’s history in manufacturing, particularly in the
textile and apparel segments has long been a significant
anchor to their economy. Thus, it is no surprise that
many residents grew concerned when industry began shifting
operations overseas. Still, many jobs are being added to
manufacturing related fields as the focus has shifted towards
automobiles, aviation, chemicals, and technology.
Moreover, many manufacturers who had previously outsourced
operations to China have begun to reverse the trend as the
cost advantages of off-shoring narrows due to rising labor and
energy costs in China.
For example, Elements Electronics, a local television
manufacturer, had previously moved operations to China, but
recently announced plans to open a $7.5 million plant at the
old Perry Ellis facility in Fairfeild County. This
announcement marks an important turning point which represents
the reality of manufacturers “re-shoring” operations back to
the United States and back to the Carolinas where the states
favorable corporate tax environment and relatively cheap land
and labor costs serve well to attract new innovative
businesses.
BMW
South Carolina has benefitted considerably
from the continued expansion of BMW operations. The
South Carolina facility currently employs 7,000 workers and
also supports an extensive supplier network that employs an
estimated 16,000 workers. Interestingly, the BMW plant
hirings have a significant multiplier effect. It is
estimated that each job created by BMW generates 4.3 jobs in
other parts of the state. Given this, the 800 new jobs
that will be added by the $1 billion expansion could
indirectly create an additional 2,400 jobs in the state.
As far as research and development, BMW erected the BMW Group
Information Technology Research Center in 2005 as part of its
regional investment and partnership with the State of South
Carolina. Along with Clemson University, BMW, and the
state have also created the International Center for
Automotive Research and CU-ICAR campus. Both research
centers house laboratories where research is conducted on
prototype vehicles by BMW engineers and graduate school
students alike. From these programs, BMW looks to create
and recruit quality innovative engineers.
The company boasts -- "Innovation is at the core of everything
we do" says Trudy Hardy, Vice President of marketing at BMW
North America. Some of these innovations
involve fully automated cars, energy efficiency, and
innovative accessories. For instance, BMW's new i3
"Megacity Vehicle" and i8 hybrid car are explicitly designed
to compete with cars from the Silicon Valley start-up Tesla
Motors Inc. Some innovative aspects of the i8’s design include
a full-color 'Head-Up' display which projects the speedometer
and turn-by-turn navigation instructions onto the windshield
in order to keep the driver’s eyes on the road.
Displayed below on the left is the i8's 'Surround View'
monitor which gives drivers a 360 degree view and pictured on
the right is the Head-Up display.
Although BMW represents a large, integral aspect of the South
Carolina economy, perhaps more significant is the over 250
parts suppliers, component manufacturers and other companies
which support automotive manufacturing. The state’s
skilled workforce and strong infrastructure make it a premier
location for automotive companies large and small. In
fact, South Carolina was ranked third in the nation in
Automotive Manufacturing Strength in Business Facilities
magazine’s 2012 Rankings Report.
Bosch
Robert Bosch LLC, is a leading automotive
supplier in North America with significant operations
facilities in Columbia, South Carolina. They recently
announced plans to invest $125 million to expand their
Dorchester County operations which is expected to create over
300 new jobs in the area. The company specifically
prides itself on their strong innovative strength and product
development competencies. In 2013, they invested over $6
billion in research and development and applied for over 5,000
patents. The main areas of innovation include:
fuel-injection systems for internal combustion engines,
peripheral devices for power-train control, and alternative
drive concepts. But even simple technologies involve
R&D as well. For example, Bosch has recently released two
new Aerotwin Wiper Blade sets which feature three major
innovations:
- A sleek beam design in order to
distribute more uniform pressure along the entire length
of the blade for a consistently clear wipe;
- An integrated wind spoiler which
increases down force on the wiper blade to prevent
lift-off at highway speeds; and
- Bracket-less construction and
enclosed tension springs to provide superior wiping
performance in all weather conditions.
Dayco
Dayco is a leader in the research, design
and manufacturing of a broad range of belts, tensioners and
pulleys for the automotive and trucking markets.
Although they serve a world-wide market they have significant
operations in South Carolina with their production plant in
Williston. Like all successful manufacturers, the
company prides itself on its research efforts. Thus, it
is no surprise the company stays invested in the most advanced
testing and production equipment to validate systems and
components thoroughly throughout the product development
process. To keep pace with market requirements Dayco
systematically pursues the constant improvement of its
technological and qualitative capabilities. In fact, all
company activities and processes undergo periodic review and
improvement. Recently, (October 2014) the company
announced plans to unveil two new serpentine belt
designs. One of which, the Dayco Poly Rib W2 Serpentine
Belt, is engineered to provide better noise control when noise
is caused by misalignment, an on-going problem on high mileage
vehicles. Randy Foster, Director of Product Technology
for the Dayco North American Aftermarket division had this to
say about the belt -- “We have tested this belt on
highly-demanding drives during real world use and can say it
is the quietest belt we’ve produced for our market."
Typically, it is the expenses associated with this type of
testing and the development efforts of these sorts of products
that qualify for the R&D credit.
JTEKT
JTEKT (Greenville, South Carolina) was
formed in 2006 from the merger of two Japanese companies with
a long time presence in North America. The merger
combined the steering and bearing expertise of Koyo Seiko
(operating in North America since 1958) and the machine and
driveline expertise of Toyoda Machine Works (operating in
North America since 1977). The merger created a global
company capable of providing a diverse array of technology
driven, high quality products to the world's leading
automakers including BMW in South Carolina. The company
boasts that it employs new technology to create new
value.
Some innovating technologies at JTEKT involve electric power
steering systems and hydraulic power steering systems with
motor driven pumps. JTEKT claims that these innovations
are superior to conventional hydraulic power steering in
regards to both efficiency and size and are attracting
attention around the world as products that contribute to
environmental conservation while enabling comfortable
driving. Recently, the company expanded its Koyo-brand
bearing manufacturing facility in Richland County, South
Carolina.
The 250,000 square-foot expansion will provide JTEKT with
needed capacity to manufacture automotive wheel bearing hubs
for its growing U.S. customer base and is expected to create
175 new jobs in the next three years. The expansion, the
second for this facility, will double its size to more than
500,000 square feet to accommodate the growing business volume
of Koyo wheel bearing hubs. Customers prefer the hubs
because of their advanced technologies of superior bearing
sealing capability, stiffness, weight savings and
efficiency. It is these type of technology developments
that typically trigger the R&D credit. For more
information on R&D as it relates to the automotive
industry see “The
R&D Tax Aspects of Advanced Driver Assist Systems”.
Boeing
The South Carolina economy has benefited
considerably from the buildup of Boeing’s production plants in
Charleston which perform a number of critical manufacturing
operations. Originally, Boeing S.C. only integrated
sections of airplanes and shipped them off for final
assembly. Today, the facility serves as the final
assembly line for the 787 Dreamliner model. In April
2102, the first Dreamliner rolled out of the plant and took
its maiden voyage a month later that May. Further
expansions have been introduced as well. Ten miles from
the final assembly division employees now manufacture and test
interior parts at a separate recently erected facility.
The increase in the production facilities has allowed Boeing
to employee over 8,000 people in producing about 1/3 of its
Dreamliners. But there are no signs that Boeing will
limit its expansions in the region anytime soon. In
early 2013, Boeing announced its plans for two additional
Research and Engineering centers, the IT Center of Excellence,
one of about 50 around the world, which opened in North
Charleston earlier this year and the Engineering Design Center
which will design and assemble 737 MAX engine inlets.
Construction plans are set to begin in mid-2015. For more
information see “The
R&D Tax Credit Aspects of a Non-Dysfunctional Airline
Industry”.
CYTEC
Cytec is a world-wide producer of
innovative materials designed to withstand particular
environments and conditions such as the radical temperature
fluctuations that typically occur inside an airplane which
requires materials to expand and contract accordingly.
The company has significant operations in Piedmont and
RockHill which supply raw materials to companies like
Boeing. But aerospace is not the only industry which
demands these types of innovative products.
The company serves various markets including agriculture,
automotive, defense, energy, medical/pharmaceutical and mining
as well. Cytec boasts that “Research and collaboration
is at the heart of everything we do. We participate in and
lead a wide range of collaborative research and technology
projects, working alongside customers, suppliers,
universities, research technology organizations and
more.” For example, the recent replacements of
large aircraft fleets around the world is driving the demand
for lighter, stronger, and more advanced materials.
New technologies are making it possible to surpass previous
performance limitations, expand design options and lower parts
costs in order to meet this demand. Many of these
technology developments are funded by a number of public
sector agencies. Others are internally funded
collaborative ventures working closely with both industrial
and academic partners. This type of collaboration is
essential because most products are specifically developed
with each individual customer’s particular needs and
specifications in mind.
Champion Aerospace
For over 100 years Champion (Liberty, S.C.)
has been providing innovative aviation ignition components and
systems. The original Champion Spark Plug Company was
formed in 1903 in Toldeo, Ohio, and within just a few years it
had become the undisputed leader in supplying quality spark
plugs and ignition components to the aviation
industry. The company takes pride in three
particular attributes as displayed prominently on their
company website:
1. Breakthrough technology
2. Uncompromising quality and
3. Product Innovation.
If
you thought for some reason that a simple mechanism like a
spark plug did not involve constant R&D, boy were you
wrong. The visual below demonstrates how constant
product developments allow champion to develop more
high-performance, aviation grade spark plugs than any other
company in the world.
Illustrated below is a demonstration of
the Champion Aerospace spark plug technology.
3D Printing
As manufacturing becomes more
sophisticated, new innovative ways of creating products are
constantly emerging. Particularly, 3D printing is
perhaps the most pervasive of these technologies. 3D
printing is a broad innovative technology field that impacts
almost every modern industry from aircraft to apparel to
automotive manufacturing. 3D Systems in Rock Hill, SC is
a global 3D printing company that is capitalizing on this
broad market potential. Recognizing the opportunity, the
company creates product applications designed for a range of
purposes from those useful in the aerospace/defense industry
to that of help to the jewelry maker. Medical
researchers use 3D Systems’ solutions to create custom-fit
bone implants and automobile manufacturers are beginning to
use them to print up car parts. The airline industry has taken
a particular interest in 3D printed products as well. Many
airplane component parts are made up of many smaller component
parts. This creates a greater potential for malfunctions due
to wear and tear because if one component part goes down the
whole piece is liable to failure. However, with 3D printing
even metal parts can be manufactured as one whole unit through
a successive layering process. This process is more
efficient and can also be used to create designs that can’t be
made with traditional techniques. The result is that the
finished product is often stronger, lighter and can withstand
hotter temperatures inside the engine.
Despite the wide success of the technology there are still
many hurdles and much room for innovation. Among the
current challenges to existing technologies are the limited
speed and volume at which objects can be printed and the high
costs involved. Still, the goal at 3D Systems is to make
3D printing useful and practical in every manufacturing
setting and most non-manufacturing settings. For more on 3D
printing see “The
R&D Tax Credits and the U.S. 3D Printing Initiative”
and “The
R&D Tax Credit Aspects of 3D Bioprinting".
The University and
Academic Level
Given the intensive automotive
manufacturing nature of the South Carolina economy, much of
the education in the state surrounds the automotive
industry. At the Clemson University International Center
for Automotive Research in Greenville leaders have one vision
in mind – “To be the premier automotive research innovation
and educational enterprise in the world.” Many
automotive manufacturers and component parts makers also
recruit from the community colleges which aim toward
automotive specialization as well. Still, more
conventional educational disciplines are pervasive here
too.
The Medical University of South Carolina received $213 million
in federal R&D funds in 2011 according to the National
Science Foundation. Although this is not as high as
other nearby, leading, research intensive universities like
UNC Chapel Hill, it is still a significant amount ranking the
university 94th in the nation in this category right behind
other research intensive schools such as Carnegie Mellon and
just in front of well respected Universities like Stony Brook
in New York and Dartmouth in Connecticut. The
non-medical portion of the University of South Carolina also
received just over $200 million in R&D funding which makes
for a nice one-two punch given the small size of the
state.
Clemson University International
Center for Automotive Research (CU-ICAR)
In the decade since its creation,
CU-ICAR has revolutionized automotive research and put
countless members of the Greenville community back to
work. Ninety-five percent of the students who receive
education here are gainfully employed in the automotive
industry, many recruited by the nearby BMW plant in
Spartanburg. The research and development here involves
seven strategic research areas listed below:
- Advanced Powertrain Systems
- Automotive Systems Integration
- Human Factors/HMI
- Manufacturing and Materials
- Vehicle Performance
- Vehicle-to-Vehicle Connectivity
and Vehicle-Infrastructure Integration
- Vehicular Electronics
This research portfolio, like most research in the Carolinas
is driven largely by industry needs. The university is
continuously analyzing the market and surveying industry
leaders and automotive 
companies to determine their technology and
R&D focus. This is consistent with the universities goal of providing economic
development and practical experience to the local South
Carolina economy. This however, is not to say that the
university doesn’t encourage outside the box thinking.
One of the programs at CU-ICAR is Deep Orange, a dream for any
girl or boy who grows up loving cars. The students in the Deep
Orange program get funding from major car manufacturers to
build prototype cars of the future. These student
engineers at Deep Orange work with the Art Center College of
Design in Pasadena, California to come up with ideas for the
next big thing automotive design and function.
While some of their designs may never make it to market, the
outside the box thinking encouraged by the program paves the
way for future innovations in the industry. Recently,
the Deep Orange's concept car for Mazda was revealed.
Participants on the Americas Competitiveness Exchange trip in
April were treated to a peek of the concept car with such
forward-thinking design elements as hologram projectors for
mirrors. This type of technology may be
practical in the nearby future. Other nearby training
institutions and colleges provide automotive training as well.
Community Colleges
The
North and South Carolina community colleges represent an
important component of the economy in the states. The
intensive manufacturing nature of the economies demand a
skilled workforce trained in technical applications.
More than 75% of the campuses provide automated related
training in order to accommodate the intensive automotive
manufacturing industry. Still, not everybody in South
Carolina makes cars. The state contains a handful of
institutions such as the University of South Carolina which
cater to a variety of academic disciplines as well.
University of South Carolina
The
Carnegie foundation has designated the University of South
Carolina as an institution of very high research activity, its
highest rating. Faculty from a diverse range of
disciplines participate in research to benefit the people of
South Carolina, the nation and the world by tackling
challenges in the areas of health care, the environment,
alternative energy sources and the creation of advanced
materials. In support of the local economy, the university
creates materials and researches ways to improve air travel
and manufacturing, working in concert with makers of all types
of aircraft and vehicles including Boeing and BMW to bring
laboratory discoveries to the real world.
Conclusion
Manufacturing has long been a central
anchor to the South Carolina economy. Like any
manufacturing economy, innovation is crucial to economic
growth. Federal and state research and development
credits are available to stimulate these efforts.
