The R&D Tax Credit Aspects of Chemical Engineering Post Dow-DuPont Merger
Chemical-Engineering
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.
Industry
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.
Polymers
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.
Medical
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.
Bones
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.
Semiconductors
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.
Agrochemicals
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.
Biomimicry
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.
Conclusion
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.
