The R&D Tax Credit Aspects of the Commercialization of Space
Space
The national debt level of the United States has been mounting
at an unprecedented pace in recent years, eclipsing the $19
trillion threshold for the first time ever earlier in 2016.
The country’s swelling liabilities can be attributed to a
great many things, not the least of which includes entitlement
program expansion – particularly Social Security, Medicare and
Medicaid. To sustain these and other costly programs like
Obamacare, the federal government has been forced to make some
unenviable budgetary decisions and the National Aeronautics
and Space Administration (NASA) is one of the notable
government agencies that has been curtailed.
For all it does for earth science, aeronautical research, and
space exploration, NASA is appropriated less than one half of
one percent of the annual federal budget. In fact, over the
last five decades, NASA’s financing as a percentage of overall
spending has fallen precipitously from a peak of nearly 4.5%
in the mid 1960s :
While government support has unmistakably dwindled, private
enterprises – notably Space X, Blue Origin, Virgin Galactic
and a host of fledgling Silicon Valley startups – have scaled
up by way of private investment to not only fill an aching
void, but also take advantage of a tremendous growth
opportunity.
The present article will discuss the commercialization of
space exploration and the role of new entrants to NewSpace – a
term used to describe the startups ambitious enough to take on
behemoth incumbents, such as Boeing and Lockheed Martin. It
will further present the R&D tax credit opportunity
available for innovative efforts aimed at advancing new
approaches to spaceflight, exploration and discovery.
The 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 18, 2015,
President Obama signed the bill making the R&D Tax Credit
permanent. Beginning in 2016, the R&D credit can be used
to offset Alternative Minimum tax and startup businesses can
utilize the credit against up to $250,000 per year in payroll
taxes.
Origins of NewSpace
Up until a little over a decade ago,
private space travel was essentially illegal. Indeed, it
wasn't until the enactment of the Commercial Space Launch
Amendments Act of 2004 that profit-seeking enterprises were
freely able to invest and participate in space exploration.
Fast-forward twelve years later and private space companies
proudly lay claim to myriad technological achievements, such
as the first water landing of a first stage orbital capable
rocket, that rival those of NASA or any publicly-traded
aerospace and defense company.
NewSpace Global – an independent research firm that studies
the nascent private space industry – approximates that
the number of companies involved in the commercialization of
space has grown from a little over 100 to 1,000 in the last
five years . From early stage start¬ups to more mature
ventures backed by billions in investor capital, the number of
companies and entrepreneurs dedicated to space exploration and
new discoveries seemingly grows by the day. Undeniably, a new
type of “space race” is well underway; one that is introducing
more cost-effective conduits to far-away frontiers while
simultaneously contributing to unprecedented levels of
high-tech innovation.
The Key Players
Well-funded private enterprises, including
some with long track records and demonstrable successes, are
engaged in a wide range of space related R&D activities,
as summarized below:
SpaceX
Space Exploration Technologies Corporation (SpaceX), founded
in 2002 by serial entrepreneur Elon Musk and headquartered in
Hawthorne, California, has become the de facto poster child
for NewSpace. In its first decade of existence, SpaceX
absorbed roughly $1 billion of capital, of which about
one-tenth originated from Musk himself, and another $400-500
million filtered in from NASA.
SpaceX’s primary goal is to enable humans to travel to and
ideally even colonize other planets, namely Mars. In order to
accomplish such a lofty feat, SpaceX is fixated on disrupting
the market by employing a lower cost approach to new launches,
specifically reusable rockets. SpaceX has astonished vets of
the aerospace industry by managing to land Falcon 9 – its
proprietary rocket – upright on a floating platform as well as
next to a launch pad. Reusable rockets are considered to be
the Holy Grail of space exploration due to the cost savings
that can be achieved with each successive launch.
A
key obstacle confronting SpaceX, however, is creating a method
to safely reduce the speed of a cumbersome spaceship during
its descent through the thin atmosphere above Mars . As a
result, SpaceX currently spends (and will continue to spend) a
large portion of its R&D on inventing hardware capable of
softly landing on Mars’ surface.
Blue Origin
Blue Origin, based out of Kent, Washington, is a
privately-funded aerospace manufacturer and spaceflight
services company founded by Amazon.com’s chief, Jeff Bezos.
Like its competitor SpaceX, Blue Origin is dedicated to
revolutionizing access to space and is optimistic that
passenger voyages can begin to take flight as early as 2018.
However, unlike its rival in Hawthorne, Blue Origin and Bezos
have been notoriously unforthcoming about test launches,
choosing instead to only divulge select details of launches
after-the-fact so as to avoid the perception of “failing” in
the public eye. Despite the clandestine nature of Blue
Origin’s operation, there’s no denying its potential for
breakthrough R&D-driven innovation which, much like
SpaceX, is focused primarily on rocket-powered Vertical
Takeoff and Vertical Landing vehicles (VTVL) for entry to
suborbital and orbital space .
Virgin Galactic
If
there’s a reason why Bezos is so insistent on remaining
tight-lipped about Blue Origin – look no further than New
Mexico-based Virgin Galactic for insight as to why. Founded in
2004 by British entrepreneur Richard Branson, Virgin Galactic
suffered a catastrophic loss and reputational hit in October
2014 when its experimental spaceflight test vehicle, the VSS
Enterprise, broke apart and crashed in a Californian desert –
killing a pilot onboard. Up to that point, Virgin Galactic had
sustained operations on $600 million of investment, with much
of that coming from the sovereign wealth fund of Abu Dhabi.
Despite this setback, the company has continued to fundraise
and recently unveiled its newest spaceship in February 2016,
the Unity. Unlike SpaceX and Blue Origin, which are building
reusable rockets to transport both humans and cargo, Virgin
Galactic is focused entirely on tourism. The Unity is designed
to disconnect from an airplane, activate its rocket engine,
and ultimately blast into sub-orbital space. Since 2015,
Virgin Galactic has spent a large portion of overall
expenditures on various Unity redesign features, including new
engines, larger payloads and new carrier planes.
VC in the Private
Space Sector
According to a report from The Tauri Group
– a boutique consultancy focused on the aerospace and defense
industry – venture capital firms supplied $1.8 billion to
NewSpace startups in 2015, roughly two-thirds of the aggregate
amount of funding allocated to the industry in all of the
preceding 15 years combined . SpaceX, in particular, has been
a major beneficiary of this newfound investor optimism by
raising $1 billion earlier this year from a consortium of
investors headlined by Google and Fidelity.
Earth Imaging
While many of the bigger NewSpace players, such as the
aforementioned SpaceX, Blue Origin and Virgin Galactic are
focused on heavy hardware for space exploration and tourism,
many of the smaller upstarts – including Planet Labs and
Spire, which have collectively raised $200 million – are
focused on data analytics through building and supervising
clusters of small Earth-imaging satellites. In the last
several years, this particular sub-sector of the NewSpace
industry has received considerable attention and investment
dollars from venture capital funds and other investors. With
enough scale, these groups of satellites can provide dynamic,
real-time assessments of the entire planet, producing
information and statistics that companies and governments can
then use to monitor economic activity, global warming, and
almost any other kind of natural phenomena. In a way, this
sub-sector represents more of an investment bet on data
science and information analytics than it does on true
space exploration/discovery, but nonetheless demonstrates the
R&D tax credit opportunity available to new entrants in an
important and growing subset of the space industry.
Asteroid Mining & 3-D Printing
In
addition to the space-based data network, startups (and the
investors backing them) are also pouring dollars into other
niche areas, such as asteroid mining, three-dimensional (3-D)
printing , and even expandable space station modules. For
example, Deep Space Industries (DSI), based out of Mountain
View, CA, is in the business of extracting raw materials from
element-rich asteroids. These materials, in turn, can either
be put to use in space, such as for rocket propellant, or be
brought back to Earth for more mainstream commercial purposes
.
Just down the road from DSI, Made In Space, Inc. specializes
in the engineering and production of space-based
three-dimensional printers. As a result of this cutting-edge
machinery, astronauts will be able to quickly develop the
tools they need to work and live in space, and companies and
scientists back on Earth will be able to transport goods with
great rapidity to the International Space Station at reduced
cost .
3-D printing technology is still in its infancy and has
predominantly been used for prototyping. The reason for this
is that the cost to manufacture a part using 3-D printing is
linear; there are no economies of scale. However, the
manufacturing of components for the aerospace industry is a
different case. This is because these components are
constructed from very expensive materials; they are at the
long tail of manufacturing, and they are highly experimental
in nature, thus requiring the creation of multiple prototypes
before a final design can be chosen. These conditions allow
3-D printing to be an economical manufacturing technique that
can yield substantial tax credits .
BEAM
Bigelow Aerospace, headquartered in Las Vegas, Nevada, is a
NewSpace startup that creates expandable space station
modules. Expandable habitats, which are lighter in mass and
weight than their metal counterparts, can greatly increase the
efficiency with which cargo is transported for future space
missions, including potentially to deep space destinations
such as Mars.
To
demonstrate the capabilities and benefits of expandable
habitats, NASA, which awarded Bigelow Aerospace an $18 million
contract back in 2013, plans to attach the Bigelow Expandable
Activity Module (BEAM) to the International Space Station
(ISS). Set to launch on a future SpaceX resupply mission to
the ISS, BEAM will be removed from the SpaceX Dragon capsule
and subsequently become attached to the ISS using a robotic
arm. After it is secured, the BEAM will be expanded for a
planned two-year test period during which astronauts aboard
the space station can assess the efficacies of the module.
Conclusion
NASA’s persistent budget reduction over the
last several decades has supported the overall need for
privatization in the space industry. With SpaceX and
other intrepid pioneers paving the way, the number of players
in the NewSpace industry has multiplied by a factor of ten in
the last five years alone. This meteoric growth has been
catalyzed by large-scale investments targeted at everything
from reusable rockets to satellite constellations and even 3-D
printers. Companies that strive to develop new or improve upon
old products or services for space could be eligible for
substantial tax credits.