The R&D Tax Credit Aspects of the Commercialization of Space



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Space
 
        The national debt level of the United States has been mounting at an unprecedented pace in recent years, eclipsing the $19 trillion threshold for the first time ever earlier in 2016. The country’s swelling liabilities can be attributed to a great many things, not the least of which includes entitlement program expansion – particularly Social Security, Medicare and Medicaid. To sustain these and other costly programs like Obamacare, the federal government has been forced to make some unenviable budgetary decisions and the National Aeronautics and Space Administration (NASA) is one of the notable government agencies that has been curtailed.

        For all it does for earth science, aeronautical research, and space exploration, NASA is appropriated less than one half of one percent of the annual federal budget. In fact, over the last five decades, NASA’s financing as a percentage of overall spending has fallen precipitously from a peak of nearly 4.5% in the mid 1960s :
 



    
 
        While government support has unmistakably dwindled, private enterprises – notably Space X, Blue Origin, Virgin Galactic and a host of fledgling Silicon Valley startups – have scaled up by way of private investment to not only fill an aching void, but also take advantage of a tremendous growth opportunity.   

        The present article will discuss the commercialization of space exploration and the role of new entrants to NewSpace – a term used to describe the startups ambitious enough to take on behemoth incumbents, such as Boeing and Lockheed Martin. It will further present the R&D tax credit opportunity available for innovative efforts aimed at advancing new approaches to spaceflight, exploration and discovery.


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 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 up to $250,000 per year in payroll taxes.


Origins of NewSpace

        Up until a little over a decade ago, private space travel was essentially illegal. Indeed, it wasn't until the enactment of the Commercial Space Launch Amendments Act of 2004 that profit-seeking enterprises were freely able to invest and participate in space exploration. Fast-forward twelve years later and private space companies proudly lay claim to myriad technological achievements, such as the first water landing of a first stage orbital capable rocket, that rival those of NASA or any publicly-traded aerospace and defense company.

        NewSpace Global – an independent research firm that studies the nascent private space industry –  approximates that the number of companies involved in the commercialization of space has grown from a little over 100 to 1,000 in the last five years . From early stage start¬ups to more mature ventures backed by billions in investor capital, the number of companies and entrepreneurs dedicated to space exploration and new discoveries seemingly grows by the day. Undeniably, a new type of “space race” is well underway; one that is introducing more cost-effective conduits to far-away frontiers while simultaneously contributing to unprecedented levels of high-tech innovation.  


The Key Players

        Well-funded private enterprises, including some with long track records and demonstrable successes, are engaged in a wide range of space related R&D activities, as summarized below:

SpaceX
        Space Exploration Technologies Corporation (SpaceX), founded in 2002 by serial entrepreneur Elon Musk and headquartered in Hawthorne, California, has become the de facto poster child for NewSpace. In its first decade of existence, SpaceX absorbed roughly $1 billion of capital, of which about one-tenth originated from Musk himself, and another $400-500 million filtered in from NASA.

        SpaceX’s primary goal is to enable humans to travel to and ideally even colonize other planets, namely Mars. In order to accomplish such a lofty feat, SpaceX is fixated on disrupting the market by employing a lower cost approach to new launches, specifically reusable rockets. SpaceX has astonished vets of the aerospace industry by managing to land Falcon 9 – its proprietary rocket – upright on a floating platform as well as next to a launch pad. Reusable rockets are considered to be the Holy Grail of space exploration due to the cost savings that can be achieved with each successive launch.

        A key obstacle confronting SpaceX, however, is creating a method to safely reduce the speed of a cumbersome spaceship during its descent through the thin atmosphere above Mars . As a result, SpaceX currently spends (and will continue to spend) a large portion of its R&D on inventing hardware capable of softly landing on Mars’ surface.

Blue Origin
        Blue Origin, based out of Kent, Washington, is a privately-funded aerospace manufacturer and spaceflight services company founded by Amazon.com’s chief, Jeff Bezos. Like its competitor SpaceX, Blue Origin is dedicated to revolutionizing access to space and is optimistic that passenger voyages can begin to take flight as early as 2018. However, unlike its rival in Hawthorne, Blue Origin and Bezos have been notoriously unforthcoming about test launches, choosing instead to only divulge select details of launches after-the-fact so as to avoid the perception of “failing” in the public eye. Despite the clandestine nature of Blue Origin’s operation, there’s no denying its potential for breakthrough R&D-driven innovation which, much like SpaceX, is focused primarily on rocket-powered Vertical Takeoff and Vertical Landing vehicles (VTVL) for entry to suborbital and orbital space .  

Virgin Galactic
        If there’s a reason why Bezos is so insistent on remaining tight-lipped about Blue Origin – look no further than New Mexico-based Virgin Galactic for insight as to why. Founded in 2004 by British entrepreneur Richard Branson, Virgin Galactic suffered a catastrophic loss and reputational hit in October 2014 when its experimental spaceflight test vehicle, the VSS Enterprise, broke apart and crashed in a Californian desert – killing a pilot onboard. Up to that point, Virgin Galactic had sustained operations on $600 million of investment, with much of that coming from the sovereign wealth fund of Abu Dhabi.  

        Despite this setback, the company has continued to fundraise and recently unveiled its newest spaceship in February 2016, the Unity. Unlike SpaceX and Blue Origin, which are building reusable rockets to transport both humans and cargo, Virgin Galactic is focused entirely on tourism. The Unity is designed to disconnect from an airplane, activate its rocket engine, and ultimately blast into sub-orbital space. Since 2015, Virgin Galactic has spent a large portion of overall expenditures on various Unity redesign features, including new engines, larger payloads and new carrier planes.


VC in the Private Space Sector

        According to a report from The Tauri Group – a boutique consultancy focused on the aerospace and defense industry – venture capital firms supplied $1.8 billion to NewSpace startups in 2015, roughly two-thirds of the aggregate amount of funding allocated to the industry in all of the preceding 15 years combined . SpaceX, in particular, has been a major beneficiary of this newfound investor optimism by raising $1 billion earlier this year from a consortium of investors headlined by Google and Fidelity.  

Earth Imaging
        While many of the bigger NewSpace players, such as the aforementioned SpaceX, Blue Origin and Virgin Galactic are focused on heavy hardware for space exploration and tourism, many of the smaller upstarts – including Planet Labs and Spire, which have collectively raised $200 million – are focused on data analytics through building and supervising clusters of small Earth-imaging satellites. In the last several years, this particular sub-sector of the NewSpace industry has received considerable attention and investment dollars from venture capital funds and other investors. With enough scale, these groups of satellites can provide dynamic, real-time assessments of the entire planet, producing information and statistics that companies and governments can then use to monitor economic activity, global warming, and almost any other kind of natural phenomena. In a way, this sub-sector represents more of an investment bet on data science  and information analytics than it does on true space exploration/discovery, but nonetheless demonstrates the R&D tax credit opportunity available to new entrants in an important and growing subset of the space industry.  

Asteroid Mining & 3-D Printing
        In addition to the space-based data network, startups (and the investors backing them) are also pouring dollars into other niche areas, such as asteroid mining, three-dimensional (3-D) printing , and even expandable space station modules. For example, Deep Space Industries (DSI), based out of Mountain View, CA, is in the business of extracting raw materials from element-rich asteroids. These materials, in turn, can either be put to use in space, such as for rocket propellant, or be brought back to Earth for more mainstream commercial purposes .

        Just down the road from DSI, Made In Space, Inc. specializes in the engineering and production of space-based three-dimensional printers. As a result of this cutting-edge machinery, astronauts will be able to quickly develop the tools they need to work and live in space, and companies and scientists back on Earth will be able to transport goods with great rapidity to the International Space Station at reduced cost .  

        3-D printing technology is still in its infancy and has predominantly been used for prototyping. The reason for this is that the cost to manufacture a part using 3-D printing is linear; there are no economies of scale. However, the manufacturing of components for the aerospace industry is a different case. This is because these components are constructed from very expensive materials; they are at the long tail of manufacturing, and they are highly experimental in nature, thus requiring the creation of multiple prototypes before a final design can be chosen. These conditions allow 3-D printing to be an economical manufacturing technique that can yield substantial tax credits .

BEAM
        Bigelow Aerospace, headquartered in Las Vegas, Nevada, is a NewSpace startup that creates expandable space station modules. Expandable habitats, which are lighter in mass and weight than their metal counterparts, can greatly increase the efficiency with which cargo is transported for future space missions, including potentially to deep space destinations such as Mars.

        To demonstrate the capabilities and benefits of expandable habitats, NASA, which awarded Bigelow Aerospace an $18 million contract back in 2013, plans to attach the Bigelow Expandable Activity Module (BEAM) to the International Space Station (ISS). Set to launch on a future SpaceX resupply mission to the ISS, BEAM will be removed from the SpaceX Dragon capsule and subsequently become attached to the ISS using a robotic arm. After it is secured, the BEAM will be expanded for a planned two-year test period during which astronauts aboard the space station can assess the efficacies of the module.


Conclusion

        NASA’s persistent budget reduction over the last several decades has supported the overall need for privatization in the space industry.  With SpaceX and other intrepid pioneers paving the way, the number of players in the NewSpace industry has multiplied by a factor of ten in the last five years alone. This meteoric growth has been catalyzed by large-scale investments targeted at everything from reusable rockets to satellite constellations and even 3-D printers. Companies that strive to develop new or improve upon old products or services for space could be eligible for substantial tax credits.

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