Manhattan's Silicon Alley Federal & State, Tax Credit Opportunity
On top of creating thousands of jobs, the
boom in New York City's high-tech start-up industry is sure to
present a substantial R & D tax credit opportunities.
Manhattan's "Silicon Alley," located in the Chelsea and SoHo
neighborhoods, is attracting tech companies large and small.
From a tax standpoint, the more time spent developing new
products and technical services, the greater the likelihood
that companies will qualify for the R & D tax credit.
R & D Tax Credit
Defined
The Research and Development Tax Credit,
Federally enacted in 1981, allows a credit of up to 13% of
eligible spend for new and improved products and processes.
Qualified research must meet the following four criteria:
- New or improved product,
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 obtaining a patent.
The NYC Tech Market
A recent Wall Street Journal report puts
the current number of high-tech jobs in Manhattan at 90,723,
up from around 70,000 in 2005 . While much of this growth is
due to the establishment of large national headquarters for
tech giants such as Google, Twitter and Yelp, the increased
number of high-tech jobs also reflects many small companies'
entry into the city market. These companies are lured to
Manhattan because of the access to talent, investors, and
customers Silicon Alley provides.
The
high concentration of resources in one geographic area
provides efficiencies similar to those enjoyed by companies
clustered in Silicon Valley, California. R&D activity in
both areas reflects a movement toward interconnectedness and
open knowledge sharing. Rather than pour large sums of money
into in-house R&D programs, high-tech firms are finding
ways to leverage the knowledge and creativity of outside
sources. Geographic clustering facilitates this trend.
Manhattan's local officials are making their best efforts to
promote further development of Silicon Alley. For instance,
the city plans to assist many potential applicants in
obtaining jobs at newer start-ups. Further, the deputy mayor
for economic development, Robert K. Steel, has gone on record
saying that the attraction and retention of technology
companies is central to the city's long-term economic growth
plans .
Creating a High-Tech
Campus
Another way in which New York City aims
to promote Silicon Alley is through the creation of a new,
vast, tech-centered campus. When Applied Sciences NYC, a
division of the New York City Economic Development
Corporation, solicited proposals for the campus, they
underestimated the volume of submissions they received.
Several of the nation's leading research institutions, ranging
from New York University and Stanford University to the New
York Genome Center and the Mount Sinai School of Medicine,
have garnered attention for their ambitious plans to develop
anywhere from 400,000 to 2,000,000 square feet of research and
applied science laboratories. Each submission has been so
impressive that Mayor Bloomberg recently hinted that the city
might be willing to help fund two research campuses.
While the winner of the Applied Sciences NYC proposal is
expected to be announced in January, 2012, NYU has already
created a momentum shift in the city towards increased
research facilities by merging with Brooklyn Polytechnic
Institute. The merger, which occurred in 2008, greatly
augments NYU's technical course offerings.
The Added New York
Benefit
In addition to the federal R & D tax
credit, New York State offers an additional 18% credit for
Qualified Emerging Technology Companies (QETC). To qualify, a
company must meet requirements similar to those for the
Federal R&D tax credit.
In addition, a qualifying firm must have:
- 100 or fewer full-time employees
- At least 75% of full-time
employees employed in New York State
- Annual sales less than $10M and
gross revenue less than $20M
- NY-based R & D expenses must
be over 6% of net sales.
Additionally, New York State qualifying companies must be in
one of the following industries: information & computer
technologies, advanced materials & processing
technologies, engineering, production, & defense
technologies, electronic & photonic devices,
biotechnologies, or remanufacturing technologies.
The
start-ups now moving into Silicon Alley are primed for the
QETC credit, as the majority of them are in a qualifying
industry and meet the criteria necessary to receive an 18% R
& D tax credit. The QETC credit has the added benefit of
being fully refundable, unlike the federal R & D credit.
This means that a qualifying company without the tax capacity
to utilize the credit can essentially use the NYS credit as
cash venture capital funding.
Facebook "Friends" New
York
According to Chief Operating Officer
Sheryl Sandberg, Facebook will add thousands of jobs in 2012 ,
likely due to its proposed IPO. Eager to court the tech giant,
New York City has unveiled plans to assist Facebook in opening
its first engineering space outside of Silicon Valley in early
2012. In so doing, the city is poised to capitalize on many
new jobs Facebook plans to create, providing Silicon Alley
with one of the industry's prize tenants.
Conclusion
Like Facebook itself, Silicon Alley is a connected network of
companies. The innovations which result from this nexus of
activity will frequently be collaborative in nature,
reflecting the efforts of an entire ecosystem including
universities and tech firms large and small. Federal and New
York state R & D incentives reward and incentivize these
efforts. As Silicon Alley develops, tax planners should
familiarize themselves with how New York is preparing for the
future.
