The R&D Tax Credit: Helping Businesses in Indiana Succeed



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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.

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Authors

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

Preeti Sulibhavi is a CPA and Tax Analyst with R&D Tax Savers.com


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