The R&D Tax Credit Aspects of Innovation in Maryland



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Maryland
Maryland consistently ranks among the top states in the nation in Entrepreneurship and Innovation. In 2016, Maryland tied for second at 5.7% among states where overall research and development comprised the largest share of gross state product.

A cluster of private companies also benefit from their proximity to the federally funded entities and universities, some of which spend billions of dollars on research and development.  Federal and Maryland State R&D tax credits are available to help shoulder the costs related to R&D activities.


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. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax 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 payroll taxes and cash rebates.


Maryland R&D Tax Credit

The Maryland R&D Tax Credit awards a refund of 10% of eligible R&D expenses in excess of the firm’s average R&D expenses over the last four years.  The goal is to provide an incentive for businesses to increase their R&D spending each year.  However, expenses which have not increased above the previous year’s average are still eligible for a smaller refund of 3%.

To qualify the business must incur Qualified Research and Development Expenses, as defined by § 41(b) of the Internal Revenue Code in Maryland. The tax credit remains in effect until June 30, 2022, subject to extension by the General Assembly.


Cybersecurity

Maryland is home to fourteen companies on the prestigious Cybersecurity 500. The industry is booming as crucial personal and business information move into an online environment.  Unlike other cybersecurity and tech hub states like New York and California, Maryland has a much lower overall cost of doing business. The demand for the capabilities and services of the industry is strong because of proximity to both large private industry and government agencies.

Maryland also does a great job of preparing their students to succeed in the field. The state has the largest concentration of university-trained cyber engineering graduates in the world. The population has the largest concentration of STEM professionals in the United States. This is fostered by the universities and the 16 centers of academic excellence sponsored by the NSA and the Department of Homeland Security.

However, it is not just the public sector and corporate companies that fostering the development of the cybersecurity industry of the state, Maryland is also home to more than 30 incubators which host cyber startups.


HealthTech

Healthcare Technology (HealthTech) is a fast growing industry vertical within the boarder healthcare industry. The goal is to incorporate technology into existing medicine to improve medical care from both a convenience and utility for patients and doctors. HealthTech is a broad term which covers both software and hardware (medical devices).

The state of Maryland is home to the Maryland HealthTech Coalition which is described as a grassroots effort to promote an ecosystem in the Maryland region that fosters health technology innovation, investment, and growth through public and private collaboration, mentorship, leadership, and engagement. The coalition holds events and provides training and other services to HealthTech professionals and companies in the state.  Maryland also has incredibly successful incubators whose alumni have gone on to be purchased by large corporations.


Johns Hopkins University
Johns Hopkins researchers explore topics ranging from the origin and fate of the universe to developing cures for brain cancer.  The university holds an honored place among the world's greatest institutions of higher learning.   Johns Hopkins University has been leading university R&D spending every year since 1979.  In 2017, the university spent $2.6 billion on R&D, nearly $1 billion more than second place, University of Michigan who spent $1.5 billion.


Maryland Stem Cell Research Fund
The Maryland Stem Cell Research Fund (MSCRF) was established by the state of Maryland under the Maryland Stem Cell Research Act of 2006 to promote state-funded stem cell research through grants and loans.  Since its founding, over $156 million in research grants have been committed; and the program's 2020 grant budget is $8.2 million.


University of Maryland
Similar to Johns Hopkins University, the University of Maryland engages in a broad range of research activities. One area of developing research involves innovative solutions to help protect our citizens and national infrastructure from emerging cyber threats.  These cyber threats are particularly pervasive in the electrical utilities industry since electric power is the hub around which all other critical infrastructure evolves.  Terrorists therefore see this area as an ideal target. A report from the Department of Homeland Security revealed that the energy industry faced more cyber attacks between 2012 and 2013 than any other sector.

The University of Maryland’s Energy Research Center (UMERC) is an initiative dedicated to advancing energy science and technology research, with a special focus on alternative energy generation and storage.  UMERC missions include the following: 

  • Develop energy efficient and environmentally sustainable technologies
  • Educate the public about energy and environmental technologies
  • Inform the larger policy debate on urgent, global issues of sustainable energy and       environment
  • Improve U.S. energy security by developing indigenous and environmentally sustainable energy resources.

These initiatives are consistent with recent pressures on the utility industry to adapt a smarter more efficient electrical grid  nationwide. 


NASA Maryland

The Goddard Space Flight Center, located about 6 miles from Washington, D.C.  is a major U.S. laboratory for developing and operating unmanned spacecraft.  The center manages many of NASA’s Earth Observation, Astronomy, and Space Physics missions.  NASA’s Lunar Reconnaissance Orbiter is a robotic mission that set out to map the moon’s surface.  Launched in 2009, it spent its first three years collecting information about the moon and its environment.  The satellite is equipped with seven powerful instruments used to collect data, making an invaluable contribution to our knowledge about the moon. 

 

Department of Defense (DOD)

The DOD’s nationwide yearly R&D budget exceeds $63 billion.  Aberdeen Maryland is home to DOD’s Aberdeen Test Center, Edgewood Chemical Biological Center, Army Medical Research Institute of Chemical Defense, Army Material Systems Analysis Activity, and a unit of the Army Research Laboratory. 

Aberdeen Test Center: Federal funding at this center goes towards testing and developing military weapons such as guns, ammunition, night-vision devices, armored vehicles, and underwater marine systems.

Edgewood Chemical Biological Center: As the Army’s main R&D center for chemical and biological defense technology, funding at this unit goes towards smoke/obscurant equipment and applications in toxicology, biosciences, biotechnology, respiratory design, and related life sciences.

Army Medical Research Institute of Chemical Defense: The institute specializes in medical countermeasures for use against chemical warfare. 

U.S. Army Materiel Systems Analysis Activity: Research at this center involves predicting and developing weapon accuracy, target acquisition, rate of fire, probability of inflicting catastrophic damage, and system reliability. 

The Aberdeen Proving Ground: A unit of the Army research laboratory, research at the facility involves ballistics of projectiles, guns, and missiles, armor protection, munitions survivability, munitions lethality, soldier/machine interface, human interaction with military systems, networking and telecommunications, scientific visualization and high performance computing.

Maryland regularly leads the way in research and innovation with these major DOD research clusters, NASA, the VA, and a slew of major research universities in the area.  This allows the private sector to piggy-back off of innovative discoveries by large, federally funded organizations, making local private sector businesses just as innovative.


Conclusion

Federal R&D spending has been an important component of Maryland’s economy for many years and enables Maryland to be one of the most innovative states in the nation. Universities, government, and private companies alike are spearheading R&D to maintain this status. 

Private sector businesses and operations in the state are benefitting from their proximity to large research hubs and advancing their discoveries through R&D.  Both Maryland state and federal tax credits are available to stimulate and help shoulder the costs of this innovation.

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