The R&D Tax Credit Aspects of Photonics

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        Cutting edge research in photonics/optical technology provides a hopeful solution for technological hurdles being currently encountered in the electronics industry.  As the amount of electronic information being created, transmitted, and stored on a daily basis continues to grow, the use of current technology is being pressured to cope with increasingly large bandwidth demands.  In addition, the computer chip industry is demanding increasingly small products that can transmit data at ultra fast speeds.  

        One billion smartphones are sold worldwide annually, each one requiring access to a data center.  Every second, two households are being connected to the fibre-optic internet; and every 18 months the amount of data each connection demands doubles.  It is estimated that by 2045, the world will need at least 1000 times the current capacity to process the amount of data that will be used at that time.  Existing semiconductor technology that transmits data with electricity and copper simply can’t keep up with this pace.  

        Photonics technology, the use of light to transmit data provides a practical solution. Already representing 20% of global sales, photonics is increasingly consuming market share in electronics.  The exponential demand for bandwidth in our modern world means that light will soon replace copper as the means for providing internet service and transmitting/storing data.

        Still, there remains many technological challenges ahead as much is unknown when pursuing basic optical science.  However, one thing is clear: there is a vast field of opportunities with optics and photonics technology, many of which could dramatically improve our daily lives.  

        Recognizing this, nearly all photonics companies generate an annual budget which includes a line entry for R&D. The expenses that make up that figure are often eligible for significant federal and state R&D tax credits.

        While at Dover Corp., R&D Tax Savers’ president Charles Goulding handled R&D tax credits for PRC Laser Corp. and Lee Laser Inc.

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. Proposed tax extender legislation would extend the tax credit through December 31, 2016.


        Photonics is the study of light and photons, a field that encompasses research into lenses, lasers, and fiber optics.  The technology has a wide range of applications, from high powered sensors and lasers to LED’s, digital x-ray machines, and fiber optic cables.  Photonic technology is already used in sensors, laser, and other devices that depend on light to send a signal, detect information, or communicate.  The further development of photonic circuits will likely make computer chips faster and with expend less energy, leading to dramatically increased battery life, smaller and faster components, and bandwidth capabilities that are far larger than current standards.   

Industry R&D

        Virtually all photonics companies of any size are R&D intensive.  Companies with less than 100 employees represent 90% of the entire industry. Still, investments in R&D by these companies runs from 5% to as high as 20% of sales, with 8% to 12% being the industry average. These companies typically develop photonic technology in all stages of product development from completely new products, to additional features and applications for mature products and everything in between.  

        Each stage requires the support of R&D activities to maintain market share, improve market share, or acquire share in new markets based on using existing products or developing new ones.  As a broad generalization, mature product lines normally get about 20% of available R&D funding, while 50% goes to upgraded products and 30% goes for totally new products. 

Computer Chip Industry/ Silicon Photonics

        Progress in computer technology is becoming increasingly dependent on faster data transfer between and within microchips.  Most of these chips, however still use electricity to operate which is problematic since as chip components become smaller, the chips start to overheat and the small wires squeezed closely to one another start to interfere with each other.

        Using light to carry data to or between chips could solve many of these problems. The technology has the power to increase bandwidth capacity, reduce the size of microchip components and increase the speed of data transmission.  In 2006, former Intel Vice President, Pat Gelsinger stated that, "Today, optics is a niche technology. Tomorrow, it's the mainstream of every chip that we build."  Researchers around the country are working towards that end. Some common research hubs in the U.S. are discussed below.  

New York Research Hub

        The federal government recently announced a decision to make Rochester, New York the home of a new $610 million research and manufacturing hub dedicated to the development of photonics technology.  The new private-public partnership announced by the Obama Administration in July 2015 includes key players such as the Massachusetts Institute of Technology (MIT), Kodak Company, Xerox Corporation, and the Department of Defense.

        Part of the initiative involves the creation of a Photonics Manufacturing Institute that is expected to have a long lasting effect on the local economy.  “This could create, over the years, thousands and thousands of good-paying jobs,” said Senator Charles Schumer.  President of Optimax Systems Inc., Mike Mandina said the institute’s impact on the local economy will be similar to “a large firm moving into the region and doing massive hiring.”  The region already has about 100 companies focused on optics and photonics research.  

Stanford Photonics Research Center

        The Stanford Photonics Research Center is a strategic partnership between the Stanford University research community and companies employing optics and photonics in their commercial activities.  Stanford engineers at the university have designed and built a prism-like device that can split a beam of light into different colors and bend the light at right angles, a development that could eventually lead to computers utilizing optics, rather than electricity, to carry data.

        The goal is to transmit data faster and more efficiently via optical rather than electrical signals.  This is a big step toward creating a complete system for connecting computer components with light rather than wires.  Professor Jelena Vuckovic who lead the research states, "Light can carry more data than a wire, and it takes less energy to transmit photons than electrons".


        The photonics industry is undergoing extremely innovative changes and applications.  As the amount of electronic information being created each day continues to grow, existing technology is unable to keep up with the demands.  Photonics technology provides a promising solution, however, crucial technology developments must occur and hurdles must be overcome before the use of light becomes the dominant means for storing and transmitting data.  Federal and state R&D tax credits are available to help support and stimulate these efforts.

Article Citation List



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

Andrea Albanese is a Manager with R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.