National Innovation Priorities - How the 2014 Federal R&D Budget and R&D Tax Credits Integrate

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        President Obama's budget request for Fiscal Year (FY) 2014 included $142.773 billion for research and development, a $1.861 billion increase from the FY2012 actual funding level. The proposed distribution of federal R&D funding among different government agencies and multiagency initiatives serves as an interesting indicator of promising areas for innovation.

        U.S. companies and tax professionals need to understand the innovation priorities that emanate from the federal R&D budget in order to track the prospective commercialization of underlying technologies. The private sector can also profit from understanding how such priorities integrate with existing public incentive opportunities, particularly R&D tax credits.

The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit is an example of such public incentives. It 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 January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.

The Pivotal Role of Federal Investment in R&D

        The United States has one of the largest, strongest, and most successful R&D systems in the world. From a global perspective, the country ranks first in R&D expenditure in real terms and fifth in spending as a percentage of GDP. Historically, however, the commitment to R&D funding dates from no earlier than the World War II - data from 1940 shows that annual federal R&D expenditures totaled $70 million, nearly 1 percent of 1995 expenditures, adjusted for inflation.

        For more than half a century now, the Federal Government has invested in building and strengthening the research and development necessary to pursuing a variety of national goals. Scientific innovation has been seen as a means to promote sustainable economic growth and job creation, improve public health, address environmental challenges, and ensure national security.

        Through a symbiotic relationship with the private sector, government-funded initiatives have created a favorable environment for innovation. By funding more than half of all basic research in the country, the Federal Government has laid the groundwork for the development of new markets and products. Concurrently, publicly financed applied research and development efforts have made sure the U.S. remains at the leading edge of discovery.

The following table examines the proposed R&D funding for FY2014 by the character of work it supports.

Federal Research and Development Funding by Character of Work and Facilities and Equipment (dollars amounts in millions)

national innovation priorities

Source: Congressional Research Service Report for Congress, Federal Research and Development Funding: FY2014, Nov. 5, 2013, Table 2, page 4.

Notes: Totals may differ from the sum of the components due to rounding.

Federal R&D Funding by Agency

        Under President Obama's FY2014 budget request, eleven federal agencies would receive 98 percent of federal R&D funding. The following table provides data on the division of funds among agencies (both in amount of dollars and in approximate percentage points) as well as a comparison with FY2012 actual funding levels.

Federal Research and Development Funding by Agency, FY2012-FY2014 (dollars amounts in millions)


Source: Congressional Research Service Report for Congress, Federal Research and Development Funding: FY2014, Nov. 5, 2013, Table 1, page 3-4.

Notes: Totals may differ from the sum of the components due to rounding.

        The proposed federal R&D funding distribution echoes the current configuration of national innovation priorities. The following paragraphs present an overview of ongoing initiatives by the three leading agencies that concentrate almost 80 percent of requested funds.

        I.Department of Defense (DOD)

        For over half a century, the Defense Advanced Research Projects Agency (DARPA) has worked to create and prevent strategic surprises. As DOD's primary innovation engine, DARPA is engaged in the fields of biology, medicine, computer science, chemistry, physics, engineering, mathematics, material sciences, social sciences, neurosciences, and more. Two of its ongoing efforts stand out, namely, cybersecurity and robotics efforts.

        Cybersecurity is one of the most serious economic and national security challenges we face as a nation. This is particularly true in the context of the DOD, whose operations are supported by a global data network that connects computers, sensors, and equipment. DOD's ubiquity and interconnectedness expose its activities to a variety of cyber threats, from both criminal and state-sponsored adversaries.

        In this scenario, DARPA's Information and Innovation Office has developed a number of programs to advance innovation in cybersecurity. A few examples include 1) The Cyber-Insider Threat Program, aimed at improving the detection of cyber espionage; 2) The Cyber Genome Program, for the development of the core computing and networking technologies necessary to effectively protect DOD's information, information infrastructure, and mission-critical information systems; and the recently launched 3) Cyber Grand Challenge, a tournament for the creation of fully automated defensive systems.

        Long-awaited technology advancements for robots are now gaining momentum as recent developments in robot-related hardware and software trigger a new wave of robotic innovation. Industry giants have shown unprecedented interest in the subject. Google acquired eight robotics companies at the end of 2013, including Boston Dynamics, whose highly advanced robotics projects have largely been funded by DARPA.

        Launched in 2011, the National Robotics Initiative seeks to accelerate the development of robots that can work cooperatively with people. The program is supported by different federal agencies, including the National Science Foundation (NSF), the National Aeronautics and Space Administration (NASA), the National Institutes of Health (NIH), the U.S. Department of Agriculture (USDA), and the Department of Defense (DOD), through the Defense University Research Instrumentation Program.

        DARPA's engagement in robotics research comprises multiple approaches, including the advancement of autonomous robotic manipulation systems and the improvement of robot mobility. In addition, the agency promotes the DARPA Robotics Challenge, "a competition of robot systems and software teams vying to develop robots capable of assisting humans in responding to natural and man-made disasters".

II.Department of Health and Human Services

        Recipient of the second largest proposed federal R&D funding for FY2014, the HHS works primarily through the National Institutes of Health (NIH), the nation's medical research agency. Currently the largest source of funding for medical research in the world, NIH is made up of 27 Institutes and Centers.

        The proposed distribution of R&D funds across such Institutes and Centers sheds light on public health innovation priorities, which themselves reflect the urgent fight against devastating diseases. The following table presents innovative efforts from a few of these organizations, along with the FY2014 requested funding for each one of them (in millions of dollars).

        National Cancer Institute (NCI)$5,126Established in 1937, the NCI is the nation's principal institution for cancer research. Its responsibilities include coordinating the National Cancer Program; conducting and supporting cancer research; training physicians and scientists; and disseminating cancer-related information. Co-morbidities, circulating tumor cells, and cancer health disparities are examples of current NCI research priorities.

        National Heart, Lung, & Blood Institute (NHLBI)$3,09983 million Americans currently suffer from one or more types of cardiovascular disease. In the U.S., one in every four deaths is caused by heart disease. Similarly threatening, respiratory diseases - lower respiratory infections, chronic obstructive pulmonary disease (COPD), and lung, trachea, and bronchus cancers - figure among the top ten causes of death worldwide.

        The NHLBI is at the forefront of research, training, and education to the prevention of heart and lung diseases. Recent efforts include the improvement of asthma therapy for African-Americans, the development of new imaging techniques for the diagnosis of heart conditions, and the study of infection triggered strokes.

        National Institute of Diabetes and Digestive and Kidney Diseases (NIDDK)$1,812Diabetes affect more than 8% of the American population. If current trends persist, 1 in every 3 U.S. adults could have diabetes by 2050. The NIDDK, conducts, supports, and coordinates diabetes research. Ongoing research includes the improvement of blood glucose monitoring and insulin delivery, the development of new therapies to cure type 1 diabetes, the study of genetic risk factors, along with the development of effective prevention and management techniques for type 2 diabetes.

        National Institute of Mental Health (NIMH)$1,466Working for the prevention and cure of metal illnesses, the NIMH has encouraged innovative thinking and the use of novel scientific perspectives in the study of brain, behavior, and experience. The Institute has made significant progress in the study of Autism Spectrum Disorders (ASD), the fastest growing disorder of neural development in the United States. Ongoing NIMH-supported clinical trials have focused on adaptive interventions for minimally verbal children with ASD, the cognitive neuroscience of ASD, the association between ASD and immune changes in the brain, among many other topics.

        National Institute of Neurological Disorders and Stroke (NINDS)$1,643With the mission lessening the burden of neurological diseases, the NINDS has supported and performed neuroscience research, funded and conducted research training, and promoted the dissemination of scientific discoveries. Among the numerous disorders under the Institute's scope is Alzheimer's Disease (AD), the only condition among the six top killers in the U.S. for which there is no prevention, cure, or treatment. Ongoing efforts aim at contributing to the National Alzheimer's Plan's goal of effectively preventing and treating the disease by 2025. Studies have focused on the impact of risk factors associated with the development of AD, the development and testing of new therapies for AD symptoms, and the understanding of the biological processes involved.

        NINDS also supports NIH-funded efforts in the context of President Obama's BRAIN initiative, a proposed collaborative research initiative aimed at furthering our understanding of the human brain. Expected developments include the next generation of non-invasive imaging technologies, which can greatly facilitate the treatment of brain disorders.

        NIH has also worked for the neutralization of new strains of highly drug-resistant bacteria, known as superbugs. With the objective of preventing the misuse and overuse of antibiotics, important research efforts have assessed their effectiveness in treating different conditions. Genetic studies have also been underway to clarify the unique characteristics of superbugs.

III.Department of Energy

        Entitled to the third largest share of requested federal R&D funding for FY2014, DOE is committed to ensuring the country's security and prosperity by facing its energy, environmental, and nuclear challenges through innovative science and technology solutions.

        Dedicated to securing U.S. leadership in strategic areas, DOE has developed intensive innovation projects in its 17 national laboratories. Moreover, it has helped bridging the gap between R&D and commercial deployment, bringing new technologies to the market. The Department's Office of Energy Efficiency and Renewable Energy (EERE) is a clear example of a thriving innovation engine. Priority innovation areas include:

a. Advanced Batteries Technology and Biofuels:
The use of clean and renewable sources of energy, such as solar and wind, has been undermined by the fundamental problem of intermittency. DOE's advanced batteries research can open the way to cheap, high-capacity, long lifespan energy storage. In addition, such research can advance mobile power generation capacity in adverse conditions, such as extreme weather.

In an effort to bring domestically produced fossil fuel substitutes to the market, DOE is also engaged in biofuel research. Cellulosic and algal biofuels are promising emerging technologies.

b. Clean Energy Generation:
DOE's investments have opened the way to the commercialization and deployment of various clean energy technologies.

The Department has been particularly supportive of alternative photovoltaic materials and architectures. Initiatives such as the National Renewable Lab (NREL) and the PV Incubator Program have contributed to the development of low-cost, thin-film PV panels. Thin film panels, such as dye-sensitized solar cells, as well as organic and inorganic thin films have led to large increases in efficiency while providing novel and innovative properties such as mechanical flexibility and ease of fabrication.

Similarly, EREE's Wind Program has supported the development of highly efficient turbines. Recent advances also include the first tri-generation fuel cell and hydrogen energy station.

c. Energy Efficient Products and Buildings:
DOE has also supported the development and deployment of a number of innovative technologies aimed at lowering energy costs. Recent examples include a hybrid water heater by GE, an energy efficient white high-power LED by Cree, and a quiet-running heat pump for portable classrooms by Bard Manufacturing.
DOE's National Renewable Energy Laboratory was recently featured among R&D Magazine's 100 most outstanding technology developments of 2013 for the creation of a highly accurate, low-cost smart sensor capable of generating significant energy savings in commercial buildings. With the ability of gathering real-time data, novel smart sensor networks are bound to change the face of building management, enabling unprecedented energy efficiency.

Multiagency R&D Priorities

        President Obama's FY2014 budget request also supports a variety of multiagency initiatives. They reflect grand research challenges that require investments from and cooperation among multiple federal agencies.

a. National Nanotechnology Initiative (NNI):
Nanotechnology can change the way the world works. Potential benefits are plentiful and range from everyday materials to health, IT, and environmental applications. Within NNI, twenty department and agency units are requested to work together in the creation of novel approaches to promote safety, effectiveness, and responsibility in the development and use of nanotechnology. Launched in 2000, this multiagency R&D effort envisions "a future in which applications of nanotechnology will lead to a revolution in technology and industry that benefits society."

b. Networking and Information Technology Research and Development Program (NITRD):
With the objective of advancing computing, networking, and software innovation, NITRD has been the primary source of federally funded IT breakthroughs. The program's framework has enabled unique collaboration among federal agencies working to sustain U.S. technological leadership. As data volumes grow exponentially, NITRD's Big Data Senior Steering Group has worked to ensure data preservation, access, dissemination, and usability. Supercomputing, high-speed networking, cybersecurity, and software engineering are also priority areas for innovation.

c. U.S. Global Change Research Program (USGCRP):
Mandated by Congress in the Global Change Research Act of 1990, USGCRP brings together thirteen federal agencies around the common goal of building a knowledge base to inform human responses to climate change. When referring to USGCRP's work, President Obama's Memorandum on Science and Technology Priorities for the FY 2014 Budget calls for advances in the following areas: observations to detect trends in extremes; integration of observation into models; attribution of change to human or natural causes; integrated research on Earth and human systems; simulation and prediction at spatial and temporal scale conducive to decision making; and adaptation responses to changing frequency and intensity of extreme events.

d. Materials Genome Initiative (MGI):
Announced in June 2011, this multiagency initiative was designed to support the discovery, manufacturing, and deployment of advanced materials. The ability of bringing new materials to the market is crucial to ensuring global competitiveness. Advanced material systems can not only contribute to economic security but also enhance human well-being. In this context, MGI's implementation strategies include the development of a materials innovation infrastructure as well as the equipping of the next generation of materials workforce.

e. Advanced Manufacturing Partnership (AMP):
The U.S. manufacturing sector is experiencing a renaissance. According to the Boston Consulting Group, American companies will repatriate between 2 and 3 million manufacturing jobs and add $100 billion to economic growth by 2020. With the objective of accelerating the creation of high quality manufacturing jobs and enhancing U.S. global competitiveness, the AMP has a twofold R&D focus: (1) the previously discussed National Robotics Initiative and (2) the National Network for Manufacturing Innovation (NNMI).

A proposed collaboration among the National Institute of Standards and Technology (NIST), DOD, DOE, and NSF, the NNMI would promote the development of groundbreaking manufacturing technologies with broad applications. It would consist of regional hubs - public-private partnerships called Institutes for Manufacturing Innovation (IMIs) - designed to enhance competitiveness and boost local economies. Despite common goals, each IMI would have unique concentrations. Based in Youngstown, OH, the National Additive Manufacturing Innovation Institute (NAMII) is a pilot public-private manufacturing institute. Since its launching, in August 2012, NAMII has become the nation's leading partner in additive manufacturing and 3D printing technology research, discovery, creation, and innovation.

Strategy for American Innovation

        Released in 2011, the President's Strategy for American Innovation points out how government, businesses, and the American people can collaborate to promote a long run economic growth that will bring greater income, higher quality jobs, and improved quality of life to U.S. citizens. The pyramid bellow summarizes the proposed approach to ensuring America's future innovation-based prosperity.


innovation for sustainable growth and quality jobs

        In this scenario, the Government must play the role of a facilitator, providing the public support necessary to create an innovation-friendly environment. The private sector, working as an innovation engine, can take advantage of various incentive mechanisms aimed at either lowering commercial research costs or enhancing the demand for innovation.


        The Federal Government has played a central role in promoting innovation. The proposed federal R&D budget for FY2014, and particularly the requested distribution of funds across agencies and multiagency initiatives, sheds light on a set of national innovation priorities aimed at fostering sustainable economic growth and prosperity.

        In addition to the direct funding of R&D activities, the Government has acted as an innovation facilitator by offering incentives to private sector activities. For over two decades, federal R&D tax credits have lowered the costs of innovation and assisted businesses in the creation of novel products and processes. Companies engaged in R&D efforts aimed at advancing any of the national innovation priorities previously discussed are particularly strong candidates to receive federal R&D tax credits.

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

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

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