The R&D Tax Credit Aspects of Doing Business in Alabama



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alabama
Alabama’s current economic strategy is primarily focused on five main industry sectors:

        1.  Manufacturing
        2.  Agriculture
        3.  Aerospace
        4.  Information Service/Technology
        5.  Automotive

Manufacturing is very R&D intensive and relies on innovation. The state's manufacturing sector reportedly employs a larger share of the State's population than any other U.S. state.  With over 300 chemical manufacturing companies statewide, chemical engineering & manufacturing dominate in this sector. 

Agriculture  is an important sector in Alabama as well.  Alabama's agricultural production is dominated by the production of broiler chickens. Almost 60% of the state's livestock production is generated by these young chickens. The poultry industry boosts the Alabama economy by $10 billion annually. Innovations in this sector involve everything from clean organic products to robotic processors.

The aerospace  industry in the state is also extremely research and development-oriented.  Huntsville was the location of NASA’s building of the Saturn V rocket, which was the first rocket to put humans on the moon.  Since then, the industry has grown to include at least 300 aerospace companies.

The information service/technology industry in Alabama has helped the economy expand as well.  While it is not a commodity-driven economic sector, it has employed over 15,000 Alabamians and generates more than $1 billion annually.   To say that Alabama is excluded from cutting-edge technology would mean ignoring these numbers.

The automotive industry is significant as well.   Alabama automakers produced more than 1 million cars and light-trucks in 2016, setting an annual automotive production record for the State.  Research and testing are central to this industry.  New product offerings drive car sales and parts makers must engage in prototype testing and research and development in order to keep the pace with original equipment manufacturers (OEMs). 

When companies develop such technologies, they might be eligible for Research and Development (R&D) tax credits which are available to help them grow.


The Research & Development Tax Credit

Enacted in 1981, the now permanent Federal Research and Development (R&D) Tax Credit allows a credit that typically ranges from 4%-7% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • Must be technological in nature
  • Must be a component of the taxpayers business
  • Must represent R&D in the experimental sense and generally includes all such costs related to the development or improvement of a product or process
  • Must eliminate uncertainty through a process of experimentation that considers one or more alternatives

Eligible costs include US employee wages, cost of supplies consumed in the R&D process, cost of pre-production testing, US contract research expenses, and certain costs associated with developing a patent.

On December 18, 2015, President Obama signed the PATH Act, making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax for companies with revenue below $50MM and, startup businesses can obtain up to $250,000 per year in payroll tax cash rebates.


Manufacturing

Manufacturing is an enormously innovative industry in any state.  In Alabama, it is central to the state’s economy. Manufacturers in Alabama account for 17.77 percent of the total output in the state, employing 13.23 percent of the workforce. The total output from manufacturing was $37.98 billion in 2018. Also, there were 267,000 manufacturing employees in Alabama in 2018, with an average annual compensation of $69,265.   Those manufacturing employees made up a larger share of the state's population than any other U.S. state. 

Manufacturing is tremendously R&D intensive.  Developments in this industry include new products or product improvements and process improvements.  Discovering ways to increase productivity, integration of new equipment, and design of state-of-the-art facilities also involve research and experimentation.  Many of our manufacturing clients develop new and improved processes just as much as they do new and/or improved products.

Chemicals  are the most important products manufactured in Alabama in terms of value-added.  They are the number two exported product in the state.   Ground-breaking projects in the U.S. chemical industry are central to our modern standard of living.  Chemical engineers use raw materials such as oil, natural gas, air, water, metals, and minerals to create products we use daily.  Plastics, rubbers, fibers, polymers, semiconductors, explosives, detergents, pesticides, clothing, and even food products all involve some level of chemical engineering.

R&D credits are also available for food science  manufacturing companies.  The U.S. food industry is undergoing monumental changes as it faces issues of genetically modified ingredients , educating consumers, and shifting to a larger focus on environmentally and nutritious products.

Product and process development in the food processing industry involves changes to flavor, texture, temperature, customs, and consumer price constraints. Many companies incorporating healthier ingredients, such as organic ingredients , face challenges in finding supplies of suitable ingredients and successfully substituting them for the processed ingredients. Companies are incorporating improved processes and techniques, confronting the issues of whether the new processes and techniques are safe for consumers and whether they can be produced to scale. 


Agriculture

Agriculture is also an important industry in Alabama. Alabama farmers sell nearly $4 billion worth of poultry each year.  While most of Alabama's agricultural production is in livestock, 18% is in crops with greenhouse, nursery, and sod products leading the way.

Poultry, which has a $15 billion economic impact and has historically supported more than 86,000 jobs is growing across the state. In 2015, the sector added 615 new or expanded poultry houses, for a combined construction investment of $296 million. That’s up from a $30 million investment in 2010, with the numbers increasing gradually each year.

Pioneering in this industry involves everything from state-of-the-art irrigation systems, to new machinery development, to big data  analytics and genome research.  According to the United Nations, the world population is expected to reach 9.6 billion by 2050. In order to meet this unprecedented demand, global food production will have to increase by 60%, in relation to 2005/07 levels.  Our food processing and distribution clients are constantly seeking to increase throughput and improve efficiency as well.  Climate change, water scarcity, and workforce and land availability pose major challenges to this goal, putting the agricultural industry under great pressure to remain resourceful.


Aerospace

The aerospace industry in Alabama is more than 100 years old, starting with the Wright Brothers’ establishment of a civilian flight school in 1910.  Today, there are over 300 aerospace and defense companies in Alabama including Airbus, Sikorsky, Lockheed Martin, Bell Helicopter, Boeing, Northrop Grumman, GE Aviation, Airbus Military, GKN, General Dynamics, BAE Systems, Goodrich, Teledyne Brown, Pratt & Whitney, and Raytheon.

The aerospace industry is one of the most competitive industries . Cost reduction and innovation is a necessity in this sector.  You need not be Boeing to be eligible for the R&D tax credit.  All of the tier suppliers to these large companies are excellent R&D tax credit candidates.  One of our mid-market aerospace/defense clients, for example, is involved in various activities; including collaborating with third-party vendors for IT development as well as introducing more automation technology into its manufacturing.  In recent years, there has been a major demand for new aircraft around the globe.  This demand has created a huge order backlog that has yet to be fulfilled. Process improvements and efficiency projects on the manufacturing floor are therefore critical.  Research and Development tax credits are available for these efforts.


Information Services/Technology

Information technology is an extremely inventive industry.  In Alabama, information technology is particularly prevalent in the Huntsville/Madison County area of the state with more than 300 international and domestic corporations operating in that area.  These companies develop a range of technologies such as modeling and simulation technologies, cybersecurity , and data centers. Their work ranges from the design and production of electronics and computer-related technology to the manufacturing of technology hardware to the making of sensors and radars for advanced missile systems.

The future for this industry in Alabama couldn’t be brighter.  Computer systems design and management services are projected to increase employment by more than 650,000 jobs in the next five years.  In North Alabama, Google began building a $600 million data center in 2018.  The state is attractive to Google because state laws provide competitive incentives for data center projects.  Our clients have R&D eligible clients ranging from database integration and testing to coding and software development.  Such initiatives involve aspects of Research and Development.


Automotive

The automotive industry is critical to Alabama’s economy. Alabama ranks 5th in the U.S. in car and light truck production.  One-fourth of all passenger vehicles built in the south are made in Alabama.

Today’s automobile  is the most sophisticated technology owned by consumers. From the early stages of planning, automakers design innovations into new vehicles.  Virtually every aspect of the modern automobile is now high-tech, using a high-tech material, or was developed through a high-tech process.  As a result, automakers rank at the top of lists on most innovative companies, and automakers are recognized leaders in R&D investments, in Alabama, the U.S. and globally. 


Conclusion

Progress and advancement are central to Alabama’s current economic strategy.  When companies develop products and improve processes, they may be eligible for Federal R&D credits which are available to stimulate growth and help companies flourish in this economy.   

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