The R&D Tax Credit: Helping Businesses in Indiana Succeed
Indiana
Indiana is
a pro-business state with a diversified economic base that is
committed to business development and improvement. Major
innovating business sectors in the State include: manufacturing
(including additive manufacturing), life sciences and medical
technology, and food processing.
Indiana State Map
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. Since 2016, the
R&D credit has been used to offset Alternative Minimum Tax
(AMT) 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 cash rebates applied to
payroll taxes.
Indiana
Research Expense Credit
Qualifying
criteria for the Indiana R&D tax credit are considered the
following:
- The place where the
services are performed
- The residence or
business location of the person or persons performing the
services
- The place where
qualified research supplies are consumed
- Other factors that the
department deems relevant
Qualified research expense (QRE) for Indiana is
as defined by Section 41(b) of the Internal Revenue Code as in
effect on January 1, 2001.
For Indiana QREs incurred after December 31,
2009, an alternative method of calculating the credit is
available at the taxpayer’s election.
Additionally, unlike the Federal R&D tax
credit, Indiana offers taxpayers an R&D Sales Tax
Exemption for tangible personal property purchased for
purposes of R&D eligible activities.
Manufacturing
Manufacturing
is a strong industry in Indiana. In fact, the state of
Indiana’s economic development agency will launch a new smart
manufacturing hub to support the long-term growth of its
manufacturing industry, which is considered a key driver of the
local economy. The new facility will be referred to
as the Emerging Manufacturing Collaboration Center (EMC2), and
will be home to GE Additive’s state-of-the-art binder jet
technology. This will propel innovators, start-ups, and
manufacturers to advance research and development and 21st
century skills training in smart manufacturing.
Auto manufacturing has been the leading
industrial sector for several years now. A close second
is life sciences. Both are also the largest employers in
the State. Manufacturers in Indiana comprise 27.84% of
the total output in the State and employ 17.24% of the
workforce. In 2018, manufacturing output amounted to
$102 billion.
Source:
National Association of Manufacturers
Life
Sciences and Medical Technology
The future
of Indiana manufacturing lies in med-tech. It is a fact
that pharmaceutical and medical manufacturing was the leading
sector for both economic output and job growth in 2018.
BioCrossroads
BioCrossroads strives to advance Indiana to the
next generation of growth and development. They serve as a
vehicle for the continued expansion of Indiana's life sciences
industry by creating an environment that provides more
economic opportunity. BioCrossroads helps provide funding,
launch new business products, and partner with Indiana's state
research institutions, global companies, philanthropic
organizations and government. BioCrossorads is a catalyst for
the continued development and diversification of the life
sciences industry in Indiana. They promote science
education and build awareness through marketing for Indiana's
life sciences industry. BioCrossroads provides money and
support to life sciences businesses and expands partnerships
among Indiana's life sciences institutions. They also produce
improved healthcare for Indiana communities. All these efforts
create a flourishing industrial network for Indiana's growth
and innovation.
Medical Devices
Indiana is currently the national leader in
medical device manufacturing. Its medical device
industry generates more than $10 billion in revenue annually.
Indiana lawmakers are examining the ways that the state can
assist and partner in the continued growth and success of
Indiana's medical device industry. State policies, laws, and
regulations can positively affect the continued growth and
innovation of an industry that saves lives and produces
quality jobs. In fact, Northeast Indiana has 11 times
more employment in medical equipment and supplies
manufacturing than the rest of the country.
Warsaw, Indiana has earned the title “Orthopedic
Capital of the World” because of its prominence in the medical
device and technology industry. Medical device
companies in Northeast Indiana control 39.5% of the worldwide
orthopedic market, accounting for approximately $19 billion in
revenue. When combined, the medical device
companies in Fort Wayne, Indiana comprise 46% of the $7.2
billion worldwide hip market, 49% of the $8.7 billion
worldwide knee market, and 48% of the $9 billion worldwide
spine market.
Indiana Medical Device Manufacturers
Council (IMDMC)
The Indiana Medical Device Manufacturers Council
(IMDMC) is an association for medical device manufacturers.
Combined with other companies, it promotes the education and
interests of medical manufacturers in Indiana and Washington
D.C. Their focus is on delivering innovative, life-changing
technologies to their patients. IMDMC brings together large
and small medical device manufacturers to strengthen
communication and express the interests of these innovative
companies before state and federal legislatures and regulatory
agencies.
Food
Processing
Indiana
farmers and food producers are developing new and innovative
techniques and processes to boost productivity and save money.
In the agriculture industry, agrobots are
automating the process of picking small produce products like
strawberries. Such tasks have long required the backbreaking
efforts of tens of thousands of low-paid workers.
However, recent labor shortages in the industry have forced
farmers to start rethinking the way they pick the
berries. “It’s no longer a problem of how much does a
strawberry harvester cost,” said Juan Bravo, inventor of
Agrobot, the picking machine. “Now it’s about how much does it
cost to leave a field unpicked, and that’s a lot more
expensive.” Even though the machine costs about $100,000
it would still be profitable for farmers because it saves them
the expense of leaving their patches unpicked when they cannot
find workers.
The Agrobot
E-Series
Agrobots are not the only developments in
farming technology. Crop protection, irrigation,
nitrogen use efficiency, no-till farming, water harvesting and
precision agriculture all involve substantial research and
development.
Consumer demand is also driving innovation on
the production side of the food industry. Meaningful
changes in core ingredients for food products require
laboratory activity because consumers are demanding healthier
products that still taste the same as their less healthy
counterparts. Large food manufacturers have huge contingents
of chemists, scientists, and nutritionists constantly seeking
solutions to concerns created by emerging health awareness.
The major challenge for food producers is
creating a product that tastes good but is healthy at the same
time. Food companies do particularly well in
establishing the R&D tax credit. Indiana has a
significant amount of food manufacturing, production and
distribution companies due to the State’s vast amount of
available resources.
Food manufacturers can qualify for an R&D
Tax Credit in multiple ways – both for product development,
but also for process improvement. Today’s food shoppers
are far more discerning than the previous generation.
Today’s consumer demands organic, whole-grain foods, with
reduced trans-fats, sugar and salt, that is
preservative-free. In response, food companies are
substituting processed ingredients with healthy alternatives,
all while adhering to regulatory health and safety guidelines.
Food companies also face technical hurdles in
the area of packaging and distribution developments and
improvements as well. Sample activities that food
companies engage in that qualify for the R&D tax credit
include test kitchen activities, experimenting with new
ingredients, shelf-life testing and maximization, initiatives
to increase nutritional value, and incorporating new or lean
manufacturing procedures. The delicious food Indiana is
home to is often the silent result of systematic testing and
experimentation.
Developing a food product that meets these
standards involves a deep process of experimentation, which
can be costly and time-consuming, as well.
Indiana's food and agricultural sector is a $16
billion industry. Food and agricultural
innovation today is very diverse. It includes biotechnology,
plant science, bioinformatics, information technologies, food
science and food safety systems, animal health and nutrition,
cropping systems, and satellite technologies, among many
others.
Purdue
Research Park Economic Development
New
industries and new departments from existing industries grew out
of Purdue research. The nearly $1 billion Purdue Research
Foundation manages and licenses Purdue's intellectual property,
accepts gifts, administers trusts, acquires property and
performs other services helpful to the University . The park
network has four locations. It has 236 companies with more than
4,200 jobs. With more than half a million square feet dedicated
to incubation, it is the largest university-affiliated
incubation park complex in the country.
The priority of the Innovators program is for
the development of new products with commercial potential. The
Purdue Research Foundation engaged Thomas P. Miller and
Associates to conduct an independent study of the economic
impact of the Park across the State of Indiana. In their
findings, they concluded, that combined, the Park is a top 20
employer in the State. There was a $256 million investment in
the Park facilities and infrastructure from 1999-2000. They
found that the economic impact for the State of Indiana was
$1.3 billion. Also, $48 million was contributed to State and
local taxes. Since 1987, $49 million was brought to Indiana in
federal research and development grants for small businesses.
They stated that high-tech, high quality jobs pay an average
annual salary of $63,000, which is 65 percent higher than the
Indiana average. Therefore, as a result of the Park, Purdue is
viewed as a major player in commercialization and economic
development in Indiana.
Indiana
University Partners with Eli Lilly and Company
The School
of Science at Indiana University-Purdue University Indianapolis
and the Indiana University School of Medicine had announced
their collaboration with Eli Lilly and Company for the Lilly
Graduate Research Advanced Degrees program (LGRAD). The program
was designed for Lilly Research Labs employees based in
Indianapolis. The goal of the program is to help Lilly employees
obtain advanced degrees in a graduate program from the School of
Medicine or School of Science. In July 2020, the IU School
of Medicine announced a multi-million dollar strategic research
agreement with Lilly. The $5 million deal will span
multiple projects and teams. The objective is to gain
insight into the molecular and cellular changes that occur in
patients after administration of some of Lilly’s currently
marketed autoimmune therapies. These are also being
developed for the potential of new autoimmune diseases,
including inflammatory bowel disease and psoriasis.
“It makes sense for us to collaborate with IU
School of Medicine and the Indiana Clinical and Translational
Sciences Institute (ICTSI), located in our own backyard,” said
Patrik Jonsson, senior vice president and president of Lilly
Bio-Medicines in July of this year. “IU has a positive
reputation for analytics and informatics that we hope will
benefit our autoimmune pipeline for the patients it serves.”
Conclusion
Indiana is
a powerhouse of research and innovation. R&D is a key
factor in doing business in Indiana and pivotal to its
continuing economic success. Businesses should be aware of
both federal and state tax incentives which are available to
help reduce their tax liabilities while helping them grow and
thrive in this economy.
