The R&D Tax Credit Aspects of Energy Related Startups

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        The United States is one of the world’s largest energy consumers. The third largest industry in the United States is the energy industry. This industry has been growing with companies making large investments in new energy technology. In particular, microgrids, smart grids, energy storage, batteries, and fuel cells have all been popular forms of equipment that are being utilized by the public. Innovations and developments in these types of technologies allow for a more efficient use of energy. There is a large number of energy startups associated with developing these specific forms of technology which are eligible to receive the new R&D Tax Credit for Startups.

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.

R&D Tax Credit For Startups

        The new federal tax law is extremely beneficial for startups.  For the first time ever, a qualifying startup can use the credit against $250,000 per year in payroll taxes beginning January 1, 2016.  Essentially, with the new startup provision, companies can claim the credit even if they do not pay income tax and regardless of their profitability.

Tax Credit Example
        A company owes $300,000 in payroll taxes and they qualify for $100,000 in R&D tax credits. The R&D credit can now be applied to payroll taxes. Therefore, the amount of the payroll tax that has to be paid is reduced to $200,000. The most amount of money that can be deducted annually from the payroll R&D Tax Credit is $250,000. Therefore, if the company qualifies for $300,000 in R&D credits, the company would now only owe $50,000 in payroll taxes.


        Microgrids are local electric grids that can be controlled to connect or disconnect from the traditional electric grid. They are essentially powered by the main grid, but can function on their own.  This technology is seen as a great alternative for providing energy solutions. Solar, wind, geothermal, and combined heat and power systems are all sources of energy that can all be utilized to power microgrids.

        There are various microgrid projects that have been established in the United States. Several states have realized the potential that microgrids have and developed incentives for companies to invest in this type of technology.  New York, New Jersey, Maryland, California and Connecticut are some states that have already created incentive programs. In particular, New York University, Clarkson University, and the Borrego Springs, California areas have all installed microgrid systems.

        There are many benefits that microgrids offer to users. For example, it is complicated for remote areas to generate energy. It can be difficult for many remote locations to obtain sources of energy, but installing a microgrid provides these areas with the ability to fully function. There has also been an increasing amount of weather related incidents that cause power outages. The use of a microgrid system is helpful because it is able to generate electricity in the case of an emergency. Lastly, since this system is smaller than the main grid it is environmentally friendly and allows users to save on energy costs.

Smart Grids

        Smart grids are a modern form of technology to deliver users information on utility electricity delivery systems. The technology utilized is a computer-based remote control and automation. Smart grids offer functions for a wide range of locations varying from power plants to homes. One of the most important features of the smart grid is its ability to manage and control various equipment and devices from one location.

        It takes a lot of time and testing to develop and create a reliable smart grid. The smart grid system offers many benefits, such as the efficient transportation of electricity, quicker restoration of electricity after power instabilities, reduced operations and management costs for utilities, decreased peak demand, increased incorporation of large renewable energy systems and improved security.

        Smart grid components are responsible for sensing and monitoring data from the electric grid, establishing a two-way communication system to monitor the grid and real-time analysis of event predictions based on information that was gathered.  This technology will allow communities to efficiently manage the electric grid as well as meet our future growing demands.

Energy Storage

        Advances in energy storage have significantly impacted the energy sector by providing an increasing amount of supplied power, a better energy infrastructure, and cutting costs for utilities and customers. There are six conventional forms of energy storage that exists, consisting of solid state batteries, flow batteries, flywheels, compressed air energy storage, thermal and pumped hydro-power. So far, energy storage has been taken advantage of by government agencies, universities, homes, businesses and utilities.  There are many startup companies who focus on developing energy storage technology. Some startups are Aquion Energy from Pittsburgh, Pennsylvania, EnerVault in Sunnyvale, California, Imergy Power Systems Inc. based in Fremont, California, Ambri from Cambridge, Massachusetts and Ice Energy in Santa Barbara, California.

        There have been energy storage regulations passed by certain states. California, New York, Hawaii and Texas have established initiatives to reduce costs and increase revenue prospects for companies. The state of California even went as far as creating a mandate which requires major state utilities (Southern California Edison Company, Pacific Gas and Electric Company and San Diego Gas & Electric Company) to add 1,325 megawatts to their energy storage units by 2020.


        Batteries are an efficient source of energy for various industries, such as electric vehicles, robots, fuel efficient planes, utility electric grids and mobile devices. Most hybrid and electric vehicles utilize lithium-ion batteries to generate power. The well-known company, Tesla, produces electric vehicles that run on battery technology. Smart devices also require a battery in order to function. Battery technology improvements are needed to achieve a longer battery life, reduce the size of the battery and accelerate the charging cycle.  

        Tesla has developed a battery powered product known as the Powerwall, which is intended for home owners to use. Two different products were developed consisting of a 10 kWh model and a 7 kWh model. The Powerwall stores power collected from solar panels during the day to provide electricity for home owners at night.  When the battery is combined with solar panels or an additional Powerwall, users have the ability to go off the grid. Tesla’s Powerwall also has the ability to provide electricity in the event of a power outage. The company received a positive response to their Powerwall product and is already planning to release a second version of the Powerwall this summer.  

Fuel Cells

        Fuel cells are seen as a reliable and highly efficient energy source. Multiple companies have chosen to invest in this type of technology. Fuel cells can be used for various power functions, including vehicles, government buildings, backup power to data centers and more.   An advantage of fuel cells is their ability to operate like a battery without the need to be recharged. This type of technology provides electricity as long as a source of fuel is obtained. Fuel cell components include an anode, cathode and electrolyte membrane. In order for a fuel cell to function, hydrogen travels through the anode and oxygen travels through the cathode.  The overall process creates electricity for machines to utilize.

        Fuel cells offer many benefits and can be utilized in various machines and devices, such as electric vehicles and smartphones. Electric vehicles have become increasingly popular over the past few years. These particular vehicles utilize fuel cells, which allow cars to be two to three times more energy efficient than traditional cars. Fuel cells benefit the environment by eliminating harmful emissions from being released into the atmosphere. Most fuel cell electric vehicles contain a polymer electrolyte membrane (PEM) fuel cell.  

        Intelligent Energy of Loughborough, United Kingdom has been experimenting with the potential of implementing fuel cells in to smart devices. The company has created a small hydrogen fuel cell battery that can provide power for a device up to a week. This fuel cell powered battery technology could pave the way for the development of mobile devices.  Users are always looking for a phone that has a long-lasting life and this technology could be the solution.

Energy Startups

LightSail Energy
        LightSail Energy based in Berkeley, California has raised approximately $70 million so far from investors. Some significant sponsors who chose to invest in this technology include Bill Gates and Peter Thiel.   The company’s main focus is to produce the cleanest and economical energy storage system. In order to achieve this goal, the company plans to sell an energy storage component along with high pressure storage tanks for natural and industrial gases. A mist of water spray is injected into the system, which absorbs heat energy from compression and is stored for use later on. When expansion occurs, the stored heat is sprayed into the air and converted back into mechanical energy.  LightSail has invested in a large amount of research and experimentation to reach low costs as well as high efficiency and power. The system offers 300 or more hours of functioning, 1000 RPM and up to 250 kW.

        A startup from New York City, Enertiv, is a data and analytics company who gathers information on how energy is collected and analyzed in buildings. EnertivTwo is a system that can be installed in buildings to monitor up to 42 circuit breakers in an electrical panel.  This system is installed next to breaker boxes and uses split- core current transformers for monitoring. Enertiv’s platform allows users to look at a real time map to analyze specifics on how electricity is being consumed by certain devices and equipment. One of the great aspects of this system is that it is able to predict how much a bill will cost within a 2-5% margin of error.   Another great aspect of this system is that users can reduce their bill by looking at specific areas where their energy usage can be cut down.

HEVO Power
        HEVO Power from Brooklyn, NY has already developed pilot projects to implement their wireless electric charging stations. The company has created the Electric Vehicle Optimization (EVO) Power Network.  This network contains a wireless transmitter that is placed directly onto pavement and connects to the grid. A battery in a vehicle gets charged by communication through a transmitter to a wireless receiver on the car. Users can download the HEVO mobile application to see real time charging data.  HEVO has created a system which offers multiple benefits for electric vehicle users. The wireless system is easy to use, doesn’t take up valuable space and is safe for users and the surrounding environment.

XL Hybrids
        XL Hybrids is headquartered in Boston, Massachusetts primarily produces hybrid electric powertrains for commercial vehicles. The company’s hybrid electric powertrain reduces fuel usage by 20%. The company has well-known customers such as FedEx Corp., The Coca-Cola Co., and PepsiCo Inc. XL Hybrids has already successfully received approximately $10.5 million of venture funding.  They have designed a system that contains an electric motor, lithium ion battery and control software. The system can be used in new vehicles or can be installed in vehicles that have already been used. This particular technology is favored because many companies are required to meet state and federal mandates to decrease the amount of greenhouse gas emissions released into the air.

Go Electric
        Go Electric in Anderson, Indiana is working on developing uninterruptible power systems (UPS). Go Electric has recently secured a $4,000,000 investment which will assist in further developing their LYNC technology and expanding their company.  Their patented technology, known as LYNC, provides AC electrical power from AC and DC power sources. The system functions by integrating renewable energy and battery power as well as multiple generators.  LYNC technology serves to reduce energy costs, decrease peak loads and fuel consumption. The company currently has military and commercial customers. particularly in Hawaii and New York.


        Energy will always be in high demand and with the right use of technology it can be used efficiently. There are various types of equipment that produces reliable energy including microgrids, smartgrids, batteries, energy storage and fuel cells. Many startup companies have chosen to invest in developing new energy technology. R&D credits are available for startups to take advantage of in order to further expand and develop modern products.

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