Research and Development Tax Credits and Grants

Photo Credit: {link:}Darren Shaw{/link}

I’ve been doing a lot of research lately into funding and incentive programs available for new and small businesses and came across a few government incentives that could significantly reduce the cost of your development project. Since most New Product Development projects fall squarely under the definition of “research and development”, there are various credits, exclusions, and grants that could be available to you. Of course, you may already know about these incentives, and I try not to get too deep into tax law before handing over the reigns to an accountant, but it may be worth exploring how they might affect your product pipeline decisions.

State R&D Tax Credit

The Maryland Department of Business and Economic Development (DBED) offers a Research and Development Tax Credit for Maryland businesses, providing a credit of 3% of Basic R&D expenses and 10% of Growth R&D (those exceeding the average of the last four years of R&D expenses). This credit is valid through 2019. Many states have similar programs, although they vary widely. If you’re outside of Maryland, check with your state’s Department of Taxation to see if your state has a program.

State Grants

Additionally, Maryland’s DBED offers financial incentives such as grants and low-interest loans to businesses that are creating MD jobs and making capital investments. They want to make it worthwhile to increase manufacturing and create jobs in Maryland. If you’re planning a new development project, capital expenditure, or manufacturing facility, you might want to see what incentives Maryland can offer based on the number of Maryland jobs you’ll be creating.

Local Grants and Investment

Maryland’s Technology Development Corporation (TEDCO) is offering angel investment up to $220,000 for companies in Baltimore City through its Propel Baltimore Fund. If you’re a startup or early-stage technology company looking for investment, you might think about locating yourself in Baltimore City. (Don’t let The Wire scare you… Baltimore is a great city)

State Sales Tax Exemption

Research and development activities are generally exempt from Maryland’s state sales tax (currently at 6%), including any capital expenditures such as tooling and production equipment.

Federal Research Tax Credit

The Federal government also offers a Research Tax Credit of up to 20% of R&D costs. Unfortunately, it expired in Dec 31, 2011, and the Congressional Budget has been stalled, probably until the November election. It’s unsure whether it will be extended, but since this credit has been in effect since 1985 and is claimed by both large and small business, there’s a strong possibility it will be extended regardless of how the election goes. President Obama’s budget proposal even calls to increase the amount of the alternative simplified credit from 14% to 17%.

Disclaimer: I am not an accountant and this is not tax advice. Follow the links for details or check with an accountant before making financial decisions.

Update: 03-Jan-2013 Good news for businesses doing research and development. The federal R&D tax credit was not only extended into 2013 but made retroactive for 2012. Check with your accountant for details.