The R&D Tax Credit Aspects of Virginia



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Virginia
        The regional economy in Virginia is undergoing a fundamental technological change.  Business sectors in the Commonwealth are broad and diverse including food processing, aerospace, cybersecurity, life sciences, energy, manufacturing, farming and more.

        Within all of these industries, innovation is the key to economic success. In the food processing industry, scientists and engineers strive to increase taste quality, shelf life, and nutritional content.  In aerospace, common innovations involve hybrid vehicles, sleek new jet fighters, and space bound rockets.  In cybersecurity, meeting technological challenges is the lynchpin to the new modern, high tech economy.  In life sciences, the aging baby-boomer population expects access to new services and more efficient ways of meeting health care needs.  

        Energy sector innovations include everything from the integration of the smart grid to new methods of refining traditional fuels.  In manufacturing, a successful business can only survive by developing new products and new processes to remain faster and cheaper.  Even in agriculture, farmers are using drones to evaluate soil conditions, cross breeding plants in laboratories, and integrating robots on farms to pick fruit and vegetables.   

        In order to stay competitive in the modern global economy, businesses in all sectors and of all sizes must innovate. Recognizing this, the national and local governments offer Research and Development Tax Credits to stimulate innovation efforts.


The Federal 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 19, 2014 President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year. Proposed tax extender legislation would extend the tax credit through December 31, 2016.


Virginia R&D Tax Credit

        Virginia’s R&D Tax Credit follows IRC Section 41 rules for qualified activities and expenses and follows a modified version of the federal Regular Credit Method.  Companies who qualify for the federal R&D Tax Credit described above will often qualify for the state credit as well.


Food Processing

        Food processing in Virginia is a driving force in the national and global economy.  As one of Virginia’s largest manufacturing sectors, it is home to at least 580 food processing companies employing over 34,000 people.  In the last decade, large companies like Hershey, Perdue, Cargill, and Kraft along with smaller companies, such as Smithfield North, have invested over $2.1 billion in the Virginia economy and created more than 7,200 jobs.  

        Recognizing the industry’s importance on the state economy, local colleges and universities offer cutting edge degree programs geared toward food production and provide access to state-of-the-art facilities for local businesses and food scientists.  

        Virginia Tech's Department of Food Science and Technology, for example, offers undergraduate and graduate degrees in Food Science Technology including masters  and doctorate degrees. Virgina Tech’s Value Added Product Development department offers access to packaging and processing pilot equipment among other resources ranging from financial assistance to food safety regulatory assistance.   

        This is all part of the growing initiative in the industry to develop new, healthier, quality foods that are high in nutritional value and are economically produced.  


Aerospace

        The aerospace industry in Virginia is very vibrant.  As birthplace of the nation’s first civil aeronautics laboratory (NASA Langley Research Center, est. 1917), Virginiat is now home to over 265 aerospace firms who over the past decade have announced over 69 major industry products, creating over 7,268 new jobs.  In total, the industry employs at least 30,500 workers and the state ranks first in the nation in U.S. Department of Defense contracts ($44.6 billion in FY 2013).  

        Key innovators include Boeing, Rolls-Royce, Northrop Grumman, and Goodyear Tire & Rubber.  These industry leaders and smaller ones like Eagle Technologies, LLC. in Hampton, see Virginia as a good location for operations because they have access to state-of-the-art facilities such as the Commonwealth Center for Advanced Manufacturing, The Virginia Modeling, Analysis and Simulation Center, the University of Virginia and the National Institute of Aerospace. These R&D facilities, along with Virginia's prestigious research universities, give businesses direct access to cutting-edge technology and some of the world's leading researchers.


Plastics & Advanced Materials

        The plastics industry in Virginia has a robust future in the modern technological world. Plastics manufacturing touches nearly every aspect of daily modern life. Plastic manufacturing is currently the third largest manufacturing industry in the United States.  Virginia is home to over 200 plastics companies employing over 19,000 people. Industry leaders in the Commonwealth include well known names such as DuPont, Honeywell, and Rubbermaid as well as companies such as Plastics One in Roanoke. In the past decade these companies have invested over $1.02 billion and created over 4,700 jobs in Virginia.  

        Innovations in this sector involve the use of 3D printing, automation of manufacturing, and new applications of plastics materials.  In agriculture, for example, plastics contribute to higher yields as they reduce the need for pesticides and water, and protect crops against unpredictable weather. Most common uses include mulching, greenhouse covering, silage, and haystack wrapping. Challenges remain, however, particularly when it comes to the disposal of used plastic products and the development of thinner, yet robust materials, especially for mulching.

CyberSecurity

        Innovational challenges in cybersecurity are large and concerning.   President Obama has identified cybersecurity as not only one of the most serious economic and national security challenges we face as a nation, but also one that we are not adequately prepared to counter.   Cyberattack exposure to the U.S. homeland electric grids, military bases, defense contractors, transportation networks, and critical infrastructure is of major concern.   The scope of the challenge is so great that it will require the resources of large companies with security expertise such as IBM, Symantec, Cisco, McAfee, Raytheon, BAE Systems, and Northrop Grumman.

        Most of these and other companies working on cybersecurity efforts have significant operations in Virginia.  The Washington, D.C. region is the national hub for cutting-edge, intelligence technology development.  Aerospace, defense, and intelligence are the largest contributors to cybersecurity solutions and are all key industry sectors in Virginia.  

        70% of the world’s internet traffic passes through Virginia; 172,00 Virginians in the private sector work in IT; and over 65,000 Virginians work in cybersecurity occupations.  Innovations in this sector involve developing new products and firewalls that will enable us to safely and securely rely on new empowering technology that, while mostly beneficial, also puts a wealth of information at risk if not properly safeguarded.


Life Sciences

        Many leading pharmaceutical, medical device, and biotechnology firms have chosen Virginia to set up operations.  Virginia’s life sciences industry employs approximately 23,000 people at over 800 establishments throughout the Commonwealth. These companies include well known industry leaders such as Pfizer and Merck, as well as smaller players such as Vascular Aesthetics in Sterling.   Bioscience related research accounts for 50% of all academic R&D spending in Virginia (more than $1.13 billion in 2010).   Eligible R&D expenses in this sector include the following:

  • Developing new or improved pharmaceuticals, medical devices, and equipment
  • Developing productions processes for new products
  • Constructing a new facility where new technology is employed
  • Developing and designing hardware and software systems for use in hospitals or research facilities
  • Manufacturing process scale-up design and development


Energy

        With a robust and plentiful reserve of natural resources, Virginia has a very vibrant energy sector that is home to more than 400 energy companies.  31,600 people are employed in the Virginia energy industry whom create a direct economic output of over $16 billion annually.  Energy sector innovation involves everything from the integration of the smart grid to new methods of refining traditional fuels.  

        Accelerating progress in clean energy is one major area where research is particularly intensive.  Innovations in technology make it possible to substantially reduce emissions and keep climate change to manageable levels. Already, newly built buildings in Virginia consume an average of about 70% less energy than traditional buildings.  In the past five years, the cost of solar energy has dropped 80% and the price of wind has dropped by about half.  

        President Obama has set a target to reduce total U.S. emissions 26-28% below 2005 levels by 2025 and the U.S. Environmental Protection Agency has announced policies that will reduce power plant emissions 30% below 2005 levels by 2030. Research and development will help provide the innovative solutions needed for these pursuits.   


Farming

        Agriculture is Virginia’s largest industry with an annual economic impact of $52 billion and nearly 311,000 jobs in the sector.  Farms cover 8.3 million acres, or 33% of Virginia’s total land area.  Challenges in the industry involve climate change, workforce shortages, a growing world population, and crop diseases.  

        Some of the typical challenges with these issues can be addressed with technological innovations.  Virginia, as well as other farmers around the country, are incorporating innovative new techniques to combat issues of fertilizing and pesticides; using robots and state-of-the-art machinery to assist with planting and harvesting, and integrating drones and sensors to monitor soil and crop conditions.  


Conclusion

        The regional economy in Virginia is undergoing a technological change.  Innovation is the driving force for any successful business model.  The state economy, like most economies around the globe, is becoming increasingly technical.  Research and Development Tax Credits are available to help suport and stimulate these innovation efforts.

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