BioForward - Wisconsin's R&D Tax Incentives

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Grant Thornton LLPEd Maginot, Tax Partner & Wisconsin Technology Practice Leader

February 8, 2012

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Welcome, Mike Boenzi and Kristen Chapman

• Mike Boenzi, Midwest Region R&D Practice Leader

• Kristen Chapman, R&D Senior

Associate

© Grant Thornton LLP. All rights reserved.

Wisconsin's R&D Tax Incentives

Ed MaginotTax Partner & Wisconsin Technology Practice Leader

Michael BoenziMidwest Region R&D Practice Leader

Kristen ChapmanR&D Senior Associate


Today's agenda

• R&D Basics

• Wisconsin R&D Tax Credit

• Wisconsin Super R&D Credit

• Wisconsin Research Facilities Credit

• Wisconsin Sales Tax Exemption

• Biodiesel Credit

• Early Stage Seed Investment Credit


Wisconsin

• Wisconsin offers a number of tax incentives for corporations and other businesses to locate or expand their operations within the state. Currently, there are 33 credits available for corporations to claim against corporate income and franchise tax, as well as several other deductions and exemptions.

• In 2008: 308 corporations claimed $96.6 million of research

credits 53 corporations claimed $11.7 million of research

facilities credits


R&D basics

IRC §174• allowed to deduct research and

experimentation expenditures as expenses not chargeable to capital accounts

IRC §41• allows a non-refundable tax credit for

qualified research spending above a base amount

• credit attempts to boost business investment in research by reducing the tax price of that research


R&D tax credit

Expenses eligible for the credit

Qualified Research Expenses (QREs):1. In-House Research

• applies to the wages and salaries of employees and supervisors engaged in qualified research

2. Supplies• cost of materials and supplies used in qualified research

3. Contract Research • 65% of the amounts paid to outside firms or non-employees for

consulting, analysis, testing services, etc.


Qualified ResearchActivity

Process of ExperimentationTechnological in Nature

"We use the science of …""We tested…" "We learned…"

Develop a new or improve an existing function, performance, reliability, quality, or significant cost reduction IRC 41(d)(1)(B)(ii)

Eliminate uncertainty concerning capability, methodology, or appropriateness of design IRC 41(d)(1)(A)

Discover information that fundamentally relies on the principles of physical science, biological science, computer science or engineering IRC 41(d)(1)(B)(i)

Substantially all the activity constitutes elements of a process of experimentation IRC 41(d)(1)(C)

Eliminate Uncertainty

"We didn't know how to…"

Permitted Purpose

"We were trying to…"

R&D tax credit

Four-part test


R&D basics – continued

Benefits of the credit

• 20% tax credit given to taxpayers who engage in qualified research activities

• benefit is 6.5 cents on every dollar

• 1 year carryback & 20 year carryforward

• many states also have R&D credits, including Wisconsin


Wisconsin R&D tax credit

• provides incentives to C-corporations for increasing qualified research activities in Wisconsin

• does not expire (unlike the federal credit)

• credit is nonrefundable – if the credit does not entirely offset against Wisconsin franchise or income taxes due, the balance may be carried forward for 15 years

• two calculations methods:

1. Regular Method – models the federal calculation

2. AIRC Method – based on gross receipts



Regular credit

The credit equals 5% of the difference between the taxpayer's qualified research expenses conducted in Wisconsin and its Wisconsin base amount.

• Base amounta. Established firms are defined as

firms with gross receipts and qualified research expenses in at least three tax years from 1984-1988

b. Start up firms are those in which qualified research expenses began after 1983



Alternative Incremental Research Credit (AIRC)

• taxpayers may elect the AIRC computation

• equal to the percent of QREs in excess of the taxpayer's average annual gross receipts for the previous four tax years – the percentage is equal to:

• 2.65% of QREs above 1% but less than 1.5% of AAGR• 3.2% of QREs above 1.5% but less than 2.0% of AAGR• 3.75% of QREs greater than 2% of AAGR

• provides a more streamlined computation, but typically results in less of a benefit – advantageous if taxpayer has a high base amount under the regular method or incomplete records to determine base period


Wisconsin super R&D credit

For years beginning on or after January 1, 2011 a "Super R&D" credit is available in Wisconsin for C-corporations that increase their research expenditures.

The credit is equal to the amount of qualified research expenses that exceeds 1.25 times the average annual amount of qualified research expenses in the corporation's previous three tax years.

The credit can be carried forward for 5 years.


Wisconsin research facilities credit

• applies to capital investments to construct and equip new research facilities or expand existing facilities in Wisconsin

• credit is equal to 5% of the amount of qualified investments in tangible, depreciable property that is not replacement property

• the credit is nonrefundable and unused amounts may be carried forward for 15 years

• available to C-corporations


Wisconsin sales tax exemption

Manufacturing and Biotechnology

Effective January 1, 2012, Wisconsin allows an exemption from sales and use tax for purchase of the following:

• machinery and equipment, including attachments, parts, and accessories used in the performance of qualified research, as well as certain tangible personal property that is consumed or destroyed or loses its identity in conjunction with – the exemptions are available to purchasers engaged primarily in manufacturing or biotechnology in Wisconsin

• machinery, processing equipment, medicine, semen for artificial insemination, fuel and electricity, and other items that are used exclusively in raising animals for research – these items must be sold to a biotechnology business, an institution of higher education, or governmental unit



• during 2011, the sales tax exemption is lost when materials are used in the R&D area – this is true even if the materials become part of a unit that is manufactured for sale to a customer

• upon audit, an auditor will generally allow either the sales/use tax exemption or the R&D credit – but not both

• however, this changes in 2012 when Wisconsin law changes – now taxpayers can claim both the sales/use tax exemption and the R&D tax credit



• to qualify for the sales and use tax exemption, a company needs certification

• the Department of Revenue has yet to update the exemption certificate (Form S-211) for this new exemption, nor has yet to describe how to be certified as a biotechnology business

• until the form is updated, purchasers claiming this exemption should enter "exempt under Section 77.54(57) - used in qualified research" in the last box under the 'other' section of the S-211


Biodiesel credit

• nonrefundable credit equal to 10 cents per gallon for biodiesel fuel produced in Wisconsin for producers that produce at least 2.5 million gallons of biodiesel fuel per year

• for tax years beginning January 1, 2012 and before January 1, 2015

• the maximum credit that a taxpayer may claim in a taxable year is $1 million


Early stage seed investment credit

• equal to 25% of investments paid to a fund manager that invests the funds in qualified new business ventures that are certified by the WEDC

• the maximum annual amount that may be claimed by all claimants is $20.5 million in 2011

• if the investment is held for less than three years, any previously claimed credits must be repaid


Early stage seed investment credit

• A qualified new business venture must: have its headquarters in the state

have less than 100 employees

have been in business for less than 7 consecutive years

• the new business venture must also be engaged in a certain industry, including manufacturing, biotechnology, nanotechnology, communications, agriculture, pharmaceuticals, clean energy, etc.

Any questions, please contact us:

Ed Maginot | Tax PartnerT 608.286.6912E [email protected]

Michael Boenzi | Midwest Region R&D Practice LeaderT 312.602.8046E [email protected]

Kristen Chapman | R&D Senior AssociateT 414.277.1532E [email protected]

Tax Professional Standards StatementThis document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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BioForward - Wisconsin's R&D Tax Incentives