There are several credits available to high technology companies located in New York State, many of which are directed to companies that incur research and development expenses.
The most readily available tax credit for NYS companies performing R&D activities is the investment tax credit (ITC). The ITC is available to any company that purchases tangible property, including buildings, used for research and development that are placed in service during the tax year. Corporations can receive a 5% tax credit on their purchases or elect an optional 9% credit. Passthrough entities and individuals are eligible for a 7% credit on purchases of R&D property.
Suppose a company is allowed an investment tax credit in any year, and does not elect to use the 9% ITC rate. In that case, the company may claim an employment incentive credit in two succeeding years if the company increases employment in those years. The credit can be an additional up to 2.5% credit based on the amount of tangible property purchased that qualified for the ITC. Both credits can be refundable to businesses that have not been subject to NYS for more than five years.
Another available credit that is focused on increasing employment in NYS is the qualified emerging technology company (QETC) tax credit. A company can qualify as a QETC company if its primary products or services are classified as emerging technologies as defined in section 3102-e of the NYS Public Authorities Law or if the ratio of R&D expenses to net sales equals or exceeds a ratio determined by the National Science Foundation. Additionally, to qualify for the credit, the number of individuals employed full-time by a company must be at least 101% of the company’s base-year employment. If a company meets both qualifications, the credit is $1,000 for each full-time individual employed in the current tax year in excess of the base year employment period.
Companies qualifying as a QETC should also be aware of the QETC Capital Tax Credit. This credit is available to investors in QETC businesses, and the investment must result in ownership of the company. Investments via convertible notes and SAFE agreements would not qualify for this credit. The credit for investors is equal to 10% of the investment if the investor expects to hold the interest for four years or 20% if the investor expects to hold the interest for nine years. This is a great incentive for high technology companies looking to additional investors.
While not explicitly focused on research and development activities, NYS signed into law the NYS Business Incubator and Innovation Hot Spot Support Act in 2013. This act led to the creation of innovation hot spots and business incubators across NYS. If you are a qualifying entity and become a member of a hot spot, there is an income tax benefit available to you. Corporate members of an innovation hot spot are liable only for the fixed minimum tax based on the company’s gross receipts. An individual who is a sole proprietor member, a member of an LLC, or a shareholder of an S corporation, is allowed a deduction for the amount of income or gain included in his/her federal adjusted gross income that is related to the business operations of a hot spot company. These benefits are available for five years beginning in the year in which you become a member of a hot spot.
The Life Sciences Research and Development Tax credit is the newest credit of the bunch, available to companies for tax years beginning on or after 1/1/2018. Qualifying companies that employ ten or more individuals during the tax year can receive a credit equal to 15% of research and development expenses incurred in NYS for each of three consecutive tax years. To claim the credit, companies must send an application to Empire State Development annually detailing the qualifying expenses. Following review, ESD will issue a certificate of tax credit showing the amount of the tax credit and the tax year in which the credit may be claimed.
If you would like more information on how these tax credits can benefit your company reach out to your personal Sciarabba Walker contact or email us at info@swcllp.com.