BioForward - Wisconsin's R&D Tax Incentives

Welcome!

Grant Thornton LLP
Ed Maginot, Tax Partner & Wisconsin Technology
Practice Leader

February 8, 2012
© Grant Thornton. All rights reserved.

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Grant Thornton's technology industry practice

• the technology sector is 1 of 3 core industry
practices for Grant Thornton
• specialists helping companies in the following
subsectors:
– biotechnology and life sciences
– cleantech
– Internet
– software development
– hardware manufacturers
– technology services

Wisconsin bioscience

Grant Thornton is committed to
supporting the Wisconsin technology
and life sciences community.

We will continue to invest in
programs important to bioscience
entrepreneurs and business
executives.


Welcome, Mike Boenzi and Kristen Chapman

• Mike Boenzi, Midwest Region R&D
Practice Leader

• Kristen Chapman, R&D Senior
Associate


Wisconsin's R&D Tax Incentives

Ed Maginot
Tax Partner & Wisconsin Technology Practice Leader

Michael Boenzi
Midwest Region R&D Practice Leader

Kristen Chapman
R&D Senior Associate

© Grant Thornton LLP. All rights reserved.

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.


R&D tax credit

Four-part test

Permitted Purpose Eliminate Uncertainty
Eliminate uncertainty concerning capability,
Develop a new or improve an existing
methodology, or appropriateness of design
function, performance, reliability, quality, or
IRC 41(d)(1)(A)
significant cost reduction
IRC 41(d)(1)(B)(ii)
"We were trying to…" "We didn't know how to…"

Qualified Research
Activity

Technological in Nature Process of Experimentation
Discover information that fundamentally relies on Substantially all the activity constitutes
the principles of physical science, biological elements of a process of experimentation
science, computer science or engineering IRC 41(d)(1)(C)
IRC 41(d)(1)(B)(i)
"We tested…" "We learned…"
"We use the science of …"


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 amount
a. 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 Partner
T 608.286.6912
E ed.maginot@us.gt.com

Michael Boenzi | Midwest Region R&D Practice Leader
T 312.602.8046
E michael.boenzi@us.gt.com

Kristen Chapman | R&D Senior Associate
T 414.277.1532
E kristen.chapman@us.gt.com

BioForward - Wisconsin's R&D Tax Incentives

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