The economic impact of R&D tax credits on Pennsylvania businesses
Pennsylvania’s economy mixes old and new. It’s known for farming, mining, and making things like drugs and food. But it’s also pushing into new tech areas. R&D tax credits are helping this push. They give companies money back for trying new ideas.
In 2018, over 1,100 companies in Pennsylvania used these credits, which shows how important they are. The credits help in many ways: They create new jobs, help companies grow, and keep Pennsylvania competitive with other states.
These credits are especially good for some industries. Drug companies, tech firms, and manufacturers use them a lot, and even farmers are finding ways to use them. For qualified businesses in Pennsylvania, these credits can make a big difference. They’re not just saving money but helping build the state’s future.
What’s federal R&D tax credit?
The federal R&D tax credit started in 1981, gives companies a significant financial boost for innovation. It offers a 4% to 7% credit on money spent developing new or improved products and processes. To qualify, research must meet four critical criteria.
First, it must be technological, not just routine work. Second, it needs to be part of the company’s business operations. Third, the work should involve real experimentation and trying out new ideas. Lastly, it must aim to solve problems without clear solutions.
Companies can claim various expenses under this credit. These include wages for U.S. employees doing research, costs of supplies, and expenses for testing new products before they go to market. Even some outside research costs and work on developing patents can qualify.
In 2015, the PATH Act made a significant change. It made the R&D tax credit permanent and expanded its benefits. This change allows businesses to plan their research budgets more confidently, knowing the credit will be there in the future.
How is Pennsylvania’s R&D tax credit different?
Pennsylvania offers its R&D tax credit, designed to complement the federal program. The state-level credit is similar to its federal counterpart, making it easier for businesses to understand and apply for both.
Expenses like employee research wages, the costs of supplies used in R&D, and expenses for contracted research work can count as a claim. Pennsylvania’s commitment to transparency sets it apart. The state publishes detailed annual reports about the R&D tax credits it awards.
These reports are a goldmine of information, showing which companies received credits, what industries they’re in, and how much they got. This openness helps the public and policymakers understand the program’s impact.
A long-term look at the data reveals interesting trends. From 2008 to 2017, 208 taxpayers consistently received Pennsylvania R&D tax credits every year. Of these, 66 qualified as small businesses.
This shows that the credit isn’t just benefiting large corporations—it’s also helping smaller, innovative firms. One beneficial feature for small businesses is the ability to sell unused tax credits. This turns potential tax savings into immediate cash flow, which can be crucial for growing businesses.
Impact of R&D tax credits on key Pennsylvania industries
Pennsylvania’s R&D tax credits have driven innovation in several key industries. Here’s how these credits have shaped four major sectors:
Pharmaceuticals and biotechnology
Pennsylvania hosts operations of global pharma giants like Pfizer, GlaxoSmithKline, and Merck. Smaller firms like Alliance Pharma and Novum contribute to the state’s biotech sector.
R&D credits have fueled groundbreaking research here. Merck has used them to support vaccine development, including work on COVID-19 vaccines. GlaxoSmithKline has invested in new drug delivery systems to improve medication effectiveness.
These credits have also supported research into personalized medicine, gene therapy, and rare disease treatments. They’ve helped companies manage pharmaceutical research’s high costs and risks to new therapies that improve patient outcomes.
Agriculture and food production
R&D credits support innovation in Pennsylvania’s farming and food production, helping the state’s diverse agricultural output.
Agro-bots are being developed for tasks like harvesting and weed control in farming. Precision agriculture uses GPS and data analytics to improve crop yields while reducing resource use. New crop protection and irrigation systems have made farming more sustainable.
Consumer demand for healthier options has driven innovation in food production. Companies are creating new ingredients, improving nutrition, and developing novel products. Packaging innovations have focused on extending shelf life and using sustainable materials.
This progress, supported by R&D credits, is helping Pennsylvania’s agriculture and food industries stay competitive while addressing consumer needs and environmental concerns.
Distribution centers and warehouses
E-commerce growth has transformed Pennsylvania’s distribution sector, with R&D credits playing a pivotal role. Companies have invested in tech to improve efficiency and meet consumer demands.
Narrow-aisle forklifts have changed warehouse design, allowing for more compact storage. Co-bots work alongside humans, boosting productivity and safety. Smart cards and advanced conveyors have streamlined inventory management and order closing.
Retailers like Forever 21, Nordstrom, and Urban Outfitters have built new e-commerce centers in Pennsylvania for use. These investments, backed by R&D credits, have improved efficiency and created new jobs.
Natural gas sector
R&D credits have spurred advancements in Pennsylvania’s natural gas industry. New technologies like seismic imaging help companies find gas deposits more accurately. This cuts costs and reduces environmental impact. Coil tubing has made well maintenance faster and more efficient.
Companies like Range Resources and EQT Corporation have used these credits to develop new drilling techniques. These methods increase gas recovery while reducing surface disturbance. EQT invested in advanced water treatment, significantly lowering their environmental impact.
These innovations boost efficiency and bring environmental benefits. They’ve led to less water use, lower emissions, and less land disturbance. The tax credits have been vital in encouraging companies to invest in these eco-friendly technologies.
Academic powerhouses driving Pennsylvania’s R&D
Pennsylvania’s universities play a crucial role in the state’s R&D landscape. Their research efforts, supported by tax credits, contribute to innovation and economic growth.
The University of Pittsburgh led the pack in 2018 with $808 million in research funding. They’re developing diverse technologies, from dental bone grafting to augmented reality medical simulations. The Pitt Ventures program supports startups, attracts venture capital, and grows the local economy.
Carnegie Mellon University (CMU) is a world-class research institution, particularly known for its Robotics Institute. It pioneered drones, self-driving cars, space robots, and industrial robots. CMU’s global influence is clear in participating in the World Economic Forum’s “Global University Leaders Forum.”
The University of Pennsylvania’s Wharton School of Business focuses on business and economic innovation. They’ve contributed to tech advances in business, like Warby Parker’s online eyewear retailing revolution.
The recent research study, available on CiteSeerX, analyzed both federal and state R&D tax credit programs. It found that state R&D tax credits increase the number of tech businesses relative to a state’s population.
The research used a comprehensive model that accounted for various factors influencing high-tech business growth. Its findings spotlight the importance of state R&D tax motivations in driving economic development.
This study’s results are particularly relevant for Pennsylvania. They suggest that the state’s R&D tax credit program is crucial in maintaining its diverse, innovation-driven economy.
Conclusion
R&D tax credits boost Pennsylvania’s economy across many industries. They help businesses try new ideas without breaking the bank. These credits have led to better, often greener ways of working. They’ve also sparked new medicines and technologies that improve lives.
These credits are used by both big companies and small startups. They keep Pennsylvania competitive with other states and countries. State universities also use the credits to research ideas that businesses can use.
R&D tax credits are vital for Pennsylvania to keep growing and creating jobs. They push businesses to innovate. Any company in Pennsylvania looking to grow should consider using these credits. They’re key to building a strong future for the state.
FAQs
Does Pennsylvania have an R&D tax credit?
Yes, Pennsylvania offers an R&D tax credit. It’s available to businesses and individuals doing qualified research in the state. The goal is to encourage more research activities in Pennsylvania.
What is the purpose of the R&D tax credit?
The R&D tax credit aims to boost innovation and growth. It gives tax breaks to organizations that invest in qualified research and development activities. These activities are defined in Internal Revenue Code section 41.
What are the US tax incentives for R&D?
The main US incentive is the R&D Tax Credit (26 U.S. Code §41). This federal benefit provides dollar-for-dollar cash savings. Companies can claim it for developing, designing, or improving products, processes, formulas, or software.
Can you claim R&D tax credits on capitalized costs?
No, you can’t claim R&D tax credits on costs capitalized as fixed assets. However, these costs may benefit from Research and Development allowances instead.
What are the four criteria for the R&D tax credit?
The IRS defines R&D based on four criteria:
- The activity must improve a product or process’s function, performance, reliability, or quality.
- It must eliminate uncertainty.
- It must involve a process of experimentation.
- It must rely on hard science (e.g., engineering, physics, chemistry, biology, or computer science).
