The R&D Tax Credit Aspects of Chemical Engineering Post Dow-DuPont Merger

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        Innovations 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 on a daily basis.  Plastics, rubbers, fibers, polymers, semi-conductors, explosives, detergents, pesticides, clothing, and even food products all involve some level of chemical engineering.  

        Innovations in chemical engineering and advanced materials are often the triggering factor for developments in other industries as well.  Advances in precision materials engineering, for example, has made possible significant breakthroughs in semi-conductor technology which results in further innovations that ultimately trickle down to consumer products such as phones, iPads, appliances, and automotive components.  

        Precisely manipulated synthetic compounds have made it possible to create durable waterproof finishes used in rain jackets or sustainable wet suits made of plant-based materials. Recent alterations of carbon molecules in wood products has allowed scientists to create a paper product that can rival steel in terms of strength and durability.  If mass produced, it could completely revolutionize the manufacturing of automobiles, planes, fuel cells, batteries, and television screens.    

        R&D activity in the chemical engineering sector either involves new production processes or new compositions of matter (product development).  Research objectives generally include, but are not limited to, higher performing products, sustainability features, alterations aimed at regulatory compliance, and cost reductions.  

        In the lab, chemical engineers use their training to modify the chemical composition, alter the physical makeup, and develop new processes to take existing substances and create and improved materials with desirable properties and capabilities.  These and similar activities present great opportunities for federal and state R&D Tax Credits.

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 payroll taxes.


        The chemical engineering industry is very R&D intensive. Innovation has long been considered a cornerstone of growth and profitability for chemical companies and a prerequisite for long-term performance. In 2012, the industry spent $21 billion on R&D. That was more than both Aerospace & Defense and Health Care & Equipment Services, two other very R&D intensive industries.  Very recently, however, certain events have occurred that could alter the dynamics of R&D across the industry.  

        In December 2015, two industry giants announced that their board of directors approved an agreement that will essentially merge the two companies.  The Dow Chemical Company and Dupont Company which each have a market capitalization of about $60 billion will combine to create the DowDuPont Company before eventually splitting into three smaller, more specialized units.  These separate, independent units will house the agriculture and chemicals, material sciences and specialty products businesses.

        The decision likely had something to do with enhancing the value of R&D departments in both companies.  Edward D. Breen, chairman and chief executive officer of DuPont Company had this to say about the merger: “Each of these businesses will be able to allocate capital more effectively, apply its powerful innovation more productively, and extend its value-added products and solutions to more customers worldwide.” In recent years, and particularly 2015, DuPont has come under pressure from activist investor Nelson Peltz. He recently accused the company of inefficient R&D and high overhead costs.  DuPont Company CEO Ellen Kullman, responded to the criticism and defended her vision of the company as one of the few in the world that was large enough to solve the world’s big problems through science.

        Traditionally, much of the R&D in the chemical engineering industry was focused on long-term ambitious projects.  Innovations such as Nylon and Teflon were breakthrough products when they were invented in the first half of the 20th century.  Those products made Dupont Company the industry leader it is today.  Such product developments however are time consuming and expensive.  Shareholders today are more interested in incremental innovations that provide quicker returns.   

        Whatever the case, R&D tax credits are available for both ambitious projects and incremental improvements.  R&D tax law is much less stringent than patent law. Patent law demands novel improvements that have not yet been discovered in the field. These are the revolutionary type that Ellen Kullman was referring to and that previously dominated the industry.  To be eligible for R&D tax credits, however, there is no requirement that a particular innovation be “non-obvious” to the inventor. (Non-obvious is a legal term of art used to describe a breakthrough invention)  Product improvement expenses may qualify for R&D tax credits even if they are “obvious to try” and even if they are only incremental. This is the type that activist investor Nelson Peltz had in mind when he was looking at DuPont Company. Those developments usually provide a quicker return to shareholders.

        Another recent development in the industry may have an even more profound impact than the Dow/DuPont merger.  Improvements in drilling technologies have led to an increase in supply and decrease in cost of crude oil which recently slipped below $30 a barrel for the first time since December 2003. That should significantly lower raw materials costs and encourage increased output throughout the industry. Most of the products we use in our everyday lives are made from oil based materials.    Many plastics, pesticides, detergents, clothing, fibers, medicines and even food additives all contain petrochemicals.  Low oil prices should encourage more production for chemical companies and can even result in a cash flow increase that would divert funds toward R&D departments.  R&D expenses for the largest U.S. chemical companies are listed in the chart below:

University Research Alliances

        Many chemical companies look to university research alliances to gain value from their R&D investments.  Universities are increasingly focusing on creating practical value from their research efforts and bringing more products to market.

        Stephen Crawford, CTO at Eastman Chemical had this to say about corporate and university collaborations: “Innovation should not be fortuitous. It should create products that should be foreseen by the market and have a predictable value.” Eastman Chemical plans to spend about $234 million on R&D this year, a portion of which will be spent on R&D collaboration with scientists at North Carolina State University in Raleigh.  The collaboration focuses on projects ranging from fundamental chemistry to applied materials research and a schedule of costs and intellectual property arrangements are already in place.

        To date, eight patents have been filed as a result of the collaboration. In addition, several new products aided by North Carolina State researchers have been moving through the firm’s development pipeline. Eastman plans to create similar arrangements with other universities in the coming year.


        Polymer is a technical term used to describe materials that are made from simpler chemical units called monomers. The term covers a wide range of materials including nylon, Kevlar, mylar, plastics, carbon fiber, silicon and much more.  These materials are used to create an even wider breadth of products including everything from synthetic bottles, Tupperware, rubber, pipes, plastic bags, adhesives, contact lenses, bone cement, and semiconductors.

        The Department of Defense recently developed a polymer foam that can be injected into an abdominal cavity in order to put pressure on internal organs and stop bleeding.  The innovation lies in its ability to expand once it is inside the body in the proper position.  The foam can later be easily removed by doctors once a wounded soldier arrives at the medical facility.  The new material is particularly beneficial because it can significantly reduce blood loss while being administered by soldiers with little or no medical training.

Scratch Repair
        Some polymers are designed with properties that allow them to bind to other materials.  These creations are particularly useful for quick repairs or refurbishes.  Chemical engineers and polymer scientists at the University of Massachusetts, Amherst recently invented a product that can bind to tiny areas on car bodies in order to fill in scratches.  This might lead to many auto body repairs with little labor costs and no replacement parts.  

Oil Spills
        Professor Mike Chung and researchers at Penn State University recently developed a new technology for oil recovery and cleanup.  Referred to as PetroGel, this new technology offers a unique combination of advantages over the existing oil absorbents including high oil absorption capability, no water absorption, fast kinetics, easy recovery from the water’s surface, and cost-effectiveness.  

        These properties can transform an oil spill in an ocean into a soft, solid oil containing gel that can be easily collected and transported. In addition, PetroGel has the potential ability to collect all the oil molecules in one spot and transform them into a product that can be later processed back into usable oil.  Still in development, PetroGel has only been tested on a small scale, with plans  to test the product out on a larger scale in the Arctic Sea.  The challenge is whether or not 250 pounds of PetroGel can absorb ten thousand pounds of Alaskan North Slope crude oil.  The results of the testing have not yet been reported but if successful, the product has tremendous potential to prevent shoreline pollution, save wildlife, and ensure a safe seafood supply.

Transparent Soil
        European researchers recently created a synthetic polymer that they call transparent soil. The clear soil is beneficial because for the first time ever, scientists can now observe plant roots and soil conditions just by looking at them.  The transparent soil is a result of two years of research.  Mechanically, it mimics real soil, supports root structures, holds suspended materials and exchanges gases.  

        Researchers at Carnegie Mellon University recently invented a polymer that can prevent the hardening of soft tissue that often occurs after orthopedic surgery and amputations. The nano-structural polymer composite delivers unique Ribonucleic acid  (RNA) into cells at the bone trauma location which helps prevent ossification in soft tissue.

Sustainable Plastics
        Plastics engineering is one of the largest chemical R&D sectors. Innovations in plastics involve making materials more durable, flexible, versatile, cost effective and sustainable.  Startups like EcoLogic LLC in Cazenovia, NY  are trying to get plastic manufacturers to make their materials more biodegradable too.

        Plastics are oil-intensive and most of them are basically oil, chemically manipulated to be solid at room temperature.  Being oil based, however, they contain a lot of carbon.  Some innovators see this as an opportunity.  One recent development involves the ability to make plastic from carbon captured by coal-factory smokestacks.  Already may plastics can be made from at least 50% captured carbon.  R&D efforts however aim to achieve 100%.  

        Although most plastic products are oil based, the chemical engineering community has been working to develop a “bio-based” plastic product produced entirely from renewable raw materials such as corn, soybean, and other agricultural products.  This could potentially result in a reduced reliance on fossil fuels and quicker break down at landfills without producing hydrocarbons that harm the environment.  

Electroactive Polymers
        Some polymers have the ability to contract or expand when subjected to an electrical charge.  These are commonly referred to as electroactive plastics. Recent developments are being made in order to create an artificial muscle that can mimic a biological muscle by contracting or expanding in response to electrical stimulations.  

        Semiconductor chips are an enabling technology for many of the electrical gadgets we use on a daily basis. Turning silicone into semiconductor chips however, is a meticulous undertaking that requires the expertise of engineers, chemists, material scientists and metallurgists. Chemical engineers have contributed maybe more than any other industry to the invention and development of semiconductor technology.  

        For each new generation of semiconductors, advanced materials must be developed with specific chemical, thermal, physical and high-purity properties for semiconductor customers who rely on materials innovations in order to keep moving forward. 

        As the global population expands, agricultural chemistry has become increasingly important. World acreage for food supply is shrinking because many areas previously dedicated to edible crop consumption are now being used for the production of biofuels. The response to the dilemma has been the extensive use of agrochemical products which are used to maximize yields per hectare.  

        Nature often inspires innovation, which is the case with biomimicry, the process of emulating nature’s best biological properties in order to create products, materials, and solve problems. Chemical engineers often look to the chemical makeup of naturally occurring organisms in order to develop analogous solutions to particular issues. A recent innovation by Janine Benyus of the Biomimicry Guild involves mimicking the way bacteria is able to solidify their cell walls by producing a certain protein.  By emulating this phenomenon, Benyus was able to create a vaccine that does not need refrigeration.
3D Printing Materials
        Whether creating new materials or working with established ones, perfecting the 3D printing process for any given application usually depends on a fine tuning of materials. This fine tuning process usually involves adjustments to the type, quality, strength, flexibility, and other characteristics of materials.   

        Photopolymers are light sensitive polymeric materials which change their physical or chemical properties when exposed to light.  The main source of light is usually UV, which initiates a reaction and changes the properties of the photopolymers.  Using photopolymers, the material can be loaded into the 3D printer in a liquid form and be changed to a solid state after being ejected and exposed to the UV light.  

        There are various types and forms of photopolymers including liquid and solid sheets.  Generally, they contain several components including binders, photoinitiators, additives, chemical agents, plasticizers, and colorants. These various component mixtures result in differing product characteristics. Some are low molecular weight, while others are used for coupling or dimerization.  


        Innovations in chemical engineering often have positive consequences for future developments in all industries.  Federal and state R&D Tax Credits are available for innovators throughout the industry. Recent R&D Tax Credit legislation also carries positive consequences for start-ups to utilize the R&D tax credit.

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

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