The R&D Tax Credit Aspects of Innovation in Maine
maine
The local economy in Maine is undergoing a transformation that
involves new technologies, innovation, and research and
development. Once known for ship building, paper making,
and fishing, a new service economy that involves finance,
healthcare, tourism, and education is beginning to emerge.
Since the financial crises of 2008, the finance industry has
seen increasing pressure to adopt new technologies and more
creative ways of delivering services. In healthcare, the
aging baby-boomer population is creating an unprecedented
number of patients who need access to services.
Education is one of the main cornerstones of R&D
nationwide and Maine is no exception, with several world class
universities such as the University of Maine which typically
spends over $177 million annually on R&D.
Traditional sectors of the economy are innovating as
well. Maine still relies on shipbuilding for about 2% of
its total economic output. The General Dynamics shipyard
in Bath is one of the few in the country capable of building
large naval vessels, cruise ships, and deep-draft ocean going
commercial ships. In fishing, aquaculturalists are
developing new ways of breeding, raising, and harvesting fish
in order to meet the growing worldwide demand for healthy,
lean proteins.
The paper making industry is also innovating as environmental
concerns have led to innovative recycling and reuse of
paper. Consolidations and mergers in the industry have
resulted in some of the larger companies expanding their
R&D operations.
R&D however is not limited to large
companies. Maine has very few large companies that
maintain headquarters in the state. Portland and the
surrounding areas rely on a strong business culture of small
to mid-size, privately owned companies - a characteristic that
many residents see as a competitive advantage. These
smaller organizations have unique interactions with each other
and the local community that often results in creativity and
innovation.
The Federal 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 19, 2014 President
Obama signed the bill extending the R&D Tax Credit for the
2014 tax year. As of this writing, proposed tax extender
legislation would extend the tax credit through December 31,
2016.
Maine Research &
Development Tax Credit
The Maine R&D state credit is based on
a percentage of the federal R&D Tax Credit for Increasing
Research Activities. The credit is limited to 5% of the
excess qualified research expenses (QREs) over the previous
three-year average plus 7.5% of the basic research payments
under IRC § 41(e)(1)(A). The credit is further limited to 100%
of the first $25,000 in tax liability plus 75% of the tax
liability in excess of $25,000. Additionally, the credit
cannot be carried back, however, it can be carried forward for
up to 15 years.
Healthcare
Roughly 8 percent of Maine’s population
works in the healthcare and social assistance industry.
Jobs in this industry include everything from doctors to
patient transporters. It’s been among the state’s fastest
growing sectors in the past 10 years and has led to more
healthcare workers per capita than the national average,
according to a state labor report. .
The Agency for Healthcare Research and Quality (AHRQ) cited
Maine as the state having made the most progress in improving
the overall quality of health care in 2010. In addition,
the most recent AHRQ State Snapshots showed Maine ranking
third in the country for highest ranking in overall health
care performance.
Broadly speaking, healthcare innovations in Maine involve
reducing costs, improving health, and improving the patient
experience. These include everything from pharmaceutical
and medicinal developments to bioengineering and life sciences
innovations. Even robotics companies are contributing to
the efforts with non-invasive surgical machines, prosthetic
limbs that can function like real ones, and humanoids (robots
that look like humans) that may soon work alongside humans to
care for the increasing elderly population.
Construction
Construction in Maine has started to bounce
back from the recession with increasing opportunities for new
workers. Roughly 4 percent of the state’s population
works in some form of construction. According to the
National Association of Home Builders, Maine has issued more
building permits in 2014 than in 2013, which suggests that
construction activity is on the rise.
Cutting edge construction projects often involve eligible
research and development expenses. Many new facilities contain
state-of-the-art heating and lighting systems. Sometimes
designers and engineers use innovative approaches to lower
energy costs and meet sustainability standards in green
buildings. Other times, the natural landscape which
serves as a foundation for the building is not quite suitable
for construction. In this case, innovative designs are
created that involve technical challenges.
Manufacturing
Manufacturing is the largest sector in the
state's economy. Maine is a leading producer of paper
and wood products in addition to food production and
transportation equipment. The principle recipients of
the R&D credit nationwide are manufacturing
companies. In this industry, success is usually
dependent on either product development or a more efficient
method of production. Both the product and process
development are R&D tax credit eligible activities.
Agriculture
Maine’s leading agricultural products
include seafood, poultry and eggs, dairy products, cattle,
blueberries, apples and maple sugar. Despite conventional
thinking the agriculture/farming industry is quite
innovative. Farmers in Maine, as well as around
the country, are incorporating innovative new techniques to
combat issues of fertilizing and pesticides; using robots and
state-of-the-art machinery to assist with planting and
harvesting; and integrating drones and sensors to monitor soil
and crop conditions.
Ship Building
Ship building in Maine is an ancient
industry. It began in 1607 at Popham Beach when a group
of Englishmen built an ocean going vessel named Virginia for
the Queen of England and has continued in various forms ever
since. Today, the ‘Pine Tree State’ is still home to some of
the nation’s largest ship manufacturers. Bath Iron Works
in Bath and Portsmouth Naval Yard in Kittery overhaul, repair,
and modernize U.S. Navy ships and submarines.
Although an ancient industry, shipbuilding is also an
innovative one. Government and commercial ship building
contracts typically contain precise specifications for
manufacturers. Many of these specifications require
technical solutions that involve innovative problem
solving. In a recent R&D Tax Credit case, the U.S.
District Court’s Northern District of Texas allowed the entire
cost of certain ships to qualify as an R&D expense for
purposes of the R&D Tax Credit because the shipbuilder,
Trinity Industries Inc., had entered into a fixed-price
contract with the government to deliver a first in class ship
(essentially a prototype).
The IRS basically argued that because the ships were special
order, rather than sold out of inventory, they would not be
qualifying R&D expenses. The government, however, cited no
authority for that proposition and the court saw the argument
as unpersuasive.
Conversely, the court saw the nature of the contracts to
contain inherent financial risk because there was a
possibility that technological solutions could eventually
prove unfeasible. When technical uncertainty is present,
there is often a good opportunity for the R&D tax credit
even if the research is performed in pursuit of a contract
with a third party. This was the major positive take
away from the case and the same principle applies throughout
all industries.
In addition, the court
also elaborated on the correct treatment of integrating
subassemblies into a ship when those subassemblies themselves
were not particularly innovative. The government
suggested that this process was nothing more than ordering off
a menu: pick a hull from column A, a propulsion system from
column B, an HVAC from column C, etc. The court
found that this greatly oversimplified the process and
rejected the argument. Justice Godbey elaborated:
“First, many of the systems at issue
are not monolithic entities, but rather families of products
with considerable flexibility in their configuration.
Determining which configuration out of the universe
available can in particular cases itself involve a
significant research effort.
Second, the systems do not exist in a
vacuum. They interact with each other, sometimes in complex
and non-intuitive ways. A change in electronics may require
a change in power generation and distribution, which may
require a change in the engine plant, any one of which may
affect the weight distribution and performance of the vessel
as a whole.
The government, on the other hand,
insists that Trinity must break out every expense and
determine whether it is a QRE; for example, the government
criticized Trinity for claiming the cost of painting a first
in class, pointing out that painting a ship was not
experimental.
The Court conceptually agrees with
Trinity. If a first in class ship is sufficiently
experimental, the risk of failure attaches to the entire
project. The potential loss includes not just the
experimental aspects, but also the paint. The regulations
support this view.”
Fishing
As the world population continues to
increase and consumers become more health conscious about
their dietary choices, the demand for lean proteins continues
to increase. Aquaculturalists in Maine typically raise
everything from Atlantic salmon and Rainbow trout to oysters,
mussels and sand worms. The aquaculture industry in
Maine is particularly innovative. Common challenges
involve genetics and breeding, innovative fish nets,
antibiotics, feeding systems, and low-environmental impact
production processes.
Maine Center for
Creativity
The Maine Center for Creativity is a group
of organizations and professionals that work together to
energize the state’s economy through creativity and
innovation. The mission of the organization is to forge
alliances between arts and industry that make Maine
economically vital and culturally vibrant, as a place where
innovation and creativity thrive . It is part of an
emerging global trend to foster collaboration among
innovators.
Other economies have similar agendas. Most of them
involve bringing innovations born in academia to the
commercial market. Since academic scientists and
engineers conduct a large part of the nation’s basic research,
it is important that they be connected to entrepreneurs who
can bring their ideas to life. It is equally important
that commercial innovators be aware of the resources that
academia has to offer. The University of Maine, for
example, has a vast array of databases, offices, centers, and
institutes that are accessible not only to academics but
commercial users as well.
Conclusion
The local economy in Maine is undergoing a
transformation that involves new technologies, innovation and
research and development. Federal and state R&D Tax
Credits are available to help support and stimulate these
Maine innovations.
