The R&D Tax Credit Aspects of Colorado Innovation



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Colorado
Colorado has become a center of growth and innovation within the United States. Over the past five years, Colorado’s economic growth rate ranks fourth in the nation according to US News. The state’s standout sectors include cannabis, manufacturing, aerospace, craft beer & wine, and technology & startups.

This article discusses some of Colorado’s most innovative industries/firms and the attendant R&D tax credit opportunities.

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 U.S. employee wages, cost of supplies consumed in the R&D process, cost of pre-production testing, U.S. 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 for the first time, pre-profitable and pre-revenue startup businesses can obtain up to $250,000 per year in payroll taxes and cash rebates.

Colorado State Tax Incentives

The state of Colorado also offers a research and development income tax credit for companies located in designated locations, known as enterprise zones (EZs). Precertification by the zone administrator is required prior to any business activity that would generate R&D credits. Both the precertification and the final certification for the tax credits can be made via an online process.

Colorado’s Main Industries

The following sections provide an overview of Colorado’s most innovative industries:

Cannabis
Colorado continues to dominate the national cannabis1 landscape. The state set sales records in both 2019 and 2020, despite the pandemic. Sales now exceed a whopping $2 billion.

Sector innovation ranges from genetics to growing methods. The use of LED lighting2  that mimics the sun has been particularly helpful for indoor growing facilities. In addition to consuming less electricity, this technology produces less heat than traditional grow lamps, reducing refrigeration3 needs.

Another trend among Colorado’s marijuana farmers is moving out of warehouses and into greenhouses. This requires process innovation4 to provide the necessary light diffusion and the most favorable grow settings.

Bioscience research also offers great promise to the marijuana business. For example, the University of Colorado at Boulder’s Cannabis Genomic Research Initiative is engaged in sampling DNA5 from multiple cannabis species.

Since patchwork marijuana laws (and taxes) can affect profitability, firms have a strong incentive to innovative efficient operations and to take advantage of R&D tax opportunities.

Advanced Manufacturing
Colorado is at the forefront of advanced manufacturing’s U.S. resurgence6. The state’s most innovative firms use advanced processes to serve diverse sectors, from electronics and consumer products to clean energy7 systems, aerospace vehicles, and medical devices8.

The industry is geographically distributed, with over 5,900 manufacturing firms, more than 120,000 employees, and $16.3 billion in annual economic output across Colorado.

The state is home to more than 300 manufacturers and distributors9 of electronics products, components, and services. Headquartered in Inverness, Arrow Electronics is a Fortune 500 firm and Colorado’s largest revenue-generating company.

The Colorado Robotics Association comprises nearly 30 companies that offer highly innovative automation solutions10. Two examples are About Packaging Robotics, the Thornton-based manufacturer of robotic package handling systems, and Carbide Robotics, the Denver-based startup which creates advanced spherical robots for the assessment of dangerous situations.

Especially when deployed as a manufacturing process improvement, the adoption of robotics creates major R&D tax credit opportunities.

Aerospace
Colorado’s thriving private sector aerospace sector is second in the nation in employment. That achievement is partly due to four in-state military commands (Air Force Space Command, Army Space Command, NORAD, and USNORTHCOMM) and three space-related Air Force bases. These bases, along with NASA and Colorado’s university system, have generated significant aerospace research.

Over 400 consulting, engineering, manufacturing, and supplier companies provide aerospace-related products and services in Colorado, including major contractors Ball Aerospace, Boeing11, ITT Exelis, Lockheed Martin12, Northrop Grumman, Raytheon13, Sierra Nevada Corporation, and United Launch Alliance.

Even so, an estimated 84% of state aerospace firms are small businesses and startups that may be less familiar with R&D tax credit opportunities. Important areas of innovation include fuel efficiency and 3D printing.

Bioscience
Colorado is also home to a thriving bioscience industry, which includes the biotechnology, medical device, agricultural-bioscience, diagnostic14, pharmaceutical, and health care sectors. Examples of major employers in the state include Medtronic15, Covidien, Hach Company, Baxa Corporation, Roche, Clovis Oncology, ArcherDX (diagnostics), and Tolmar Pharmaceuticals.

Some Colorado firms operate within bioscience innovation communities. Located in Aurora and resting on 125 acres of land, the $5.3 billion Fitzsimmons Life Science District is one such example. Similarly, the BioFrontiers Institute, a 300,000-square-foot, $300 million multi-disciplinary research center, serves as a catalyst for bioscience innovation, specializing in genomics16, bioimaging, new therapeutic paradigms, and regenerative biology17.

Craft Beer & Wine
Examples of microbrewery innovation include process efficiency, refinement, and waste reduction. Many craft beer18 makers also use sophisticated data management to further refine their processes.

Colorado’s breweries include Avery, Renegade, New Belgium, Strange Brewing, and Dry Dock. Denver’s eight breweries make it Colorado’s beer epicenter and a national leader: According to a recent CNN report, Denver ranks fourth in craft beer cities in the United States.

Colorado’s beverage scene also includes a growing list of wineries. Like microbreweries, wineries19 innovate through process refinement. For example, some western U.S. wineries use techniques to eliminate smoke taint, and others deploy automated grape punch-down technologies to enhance productivity.

In-state wineries include Two Rivers Winery and Chateau in Grand Junction and Bookcliff Vineyards in Boulder.

Technology & Startups
Colorado’s burgeoning startup20 scene began to accelerate in the mid-2000s. The state then reached a tipping point in 2010 that established Colorado as a national startup focal point. Today, Colorado’s “techiest” cities include Denver, Boulder, Fort Collins, and Colorado Springs.

Today, tech giants Google, Facebook, and Salesforce all have opened offices in-state, as have upstarts Gusto and Robinhood. In another notable development, Palantir Technologies, the data analytics company, moved its headquarters from San Francisco to Denver in 2020.

One new firm, Hyperia, produces speech recognition software that transcribes business meetings. Another, Boulder AI, makes smart cameras connected to deep learning that provides real-time traffic and other data to customers.21

Other home-grown tech startups, including SendGrid, an email delivery service recently acquired by Twilio for $3 billion. Boulder-based Uplight is another example; the company has created an open, cloud-based software platform for personalized energy services management based on big data.22

University Research

In addition to private sector innovation, Colorado is home to leading research universities23 that are known for their engineering and applied sciences programs. These institutions have contributed to the creation of a dynamic economic environment and serve as their own innovation hubs.

University of Colorado at Boulder
Founded in 1876, CU-Boulder is the only university in the Rocky Mountain Region to be part of the Association of American Universities, an elite group of 62 research schools.

CU-Boulder is dedicated to helping businesses generate new products and technologies. Examples include a dental restorative material unveiled by 3M; and NASA’s $671 million MAVEN mission to Mars, for which the university served as project lead.

Under its Flagship 2030 strategic plan, CU-Boulder has established five research initiatives, namely:

  1. Aerospace Ventures, which combines cutting-edge aerospace engineering and science research;
  2. The BioFrontiers Institute, which transforms scientific discoveries into real-world health applications;
  3. The Computational Sciences and Engineering Initiative, focusing on aerospace, manufacturing and engineering design; bioinformatics and biology; material sciences; renewable energy; computational chemistry, molecular dynamics; and fusion energy science;
  4. The Energy Initiative, focusing on energy efficiency, energy storage, and clean tech;
  5. The Geosciences Initiative, focusing on environmental sustainability.

Colorado State University
Located in Fort Collins, CSU is a leading research university, with world-class initiatives in infectious disease, atmospheric science, clean energy technologies, environmental science, and biomedical technology.

CSU’s clean energy research supercluster has been responsible for the establishment of various innovative companies, such as Solix BioSystems, Inc., the creator of a robust algal growth system (AGS®) that is based on proprietary extended-surface area photobioreactor panels.

Dedicated to bringing CSU’s innovations and technologies into the marketplace, CSU Ventures has generated more than 550 inventions and the filing of 710 patent applications.

University of Denver
The oldest independent university in the Rocky Mountain Region, DU is a premier private university. The university recently completed a new 110,000-square-foot STEM building and plans to expand its engineering and computer science student and faculty capacity by 30 percent.

DU’s STEM research has focused on cyber security, software engineering, sustainable energy distribution and mechatronics24. The Knoebel Center focuses on STEM aspects of aging-related subjects, such as the development of orthopedic biomechanics.

Conclusion

With an increasingly dynamic and diversified economy, Colorado is home to a growing number of established firms, innovative startups, and highly qualified workers. R&D is at the heart of these developments. Colorado-based companies should take advantage of federal and state R&D tax credits to support their innovative efforts

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Authors

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

Charles Goulding Jr. is a practicing attorney with experience in R&D tax credit projects for a host of industries.


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