Council Post: The Importance Of R&D Tax Credits Being Restored To California

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Julio Gonzalez, National Tax Reform Expert and CEO of Engineered Tax Services (ETS)The Growth Partnership and ABLE CRM.

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Today, the research and development (R&D) tax credit is vital to keeping the US at the forefront of innovation. It rewards companies that develop new products, processes or inventions by offering a significant percentage in tax savings back to the company for qualified research activities and qualified research expenses.

That’s why it’s so important that on February 9, Governor Gavin Newsom signed into law a 2022-2023 budget bill that restores R&D tax credits to California. In 2020, California temporarily suspended R&D tax incentives because of the economic shock of the Covid-19 pandemic. But in 2021, California enjoyed around a $75 billion budget surplus, and this year it’s a $45.7 billion surplus, making the restoration of the credit financially feasible.

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But it wasn’t the only budgetary consideration that prompted Governor Newsom to return the credit to its rightful place. He, along with California’s other leaders, recognized the potential benefit that R&D tax credits can deliver to the Golden State. It’s this benefit that consumers, innovators and elected officials in other states should understand better. To illustrate the potential impacts of similar legislation, I’ll look at California’s experience as an example.

In 2018, California’s economy became the fifth-largest economy in the world—bigger than India and the United Kingdom. In 2021, California’s GDP was $2.8 trillionrepresenting about 14% of the total US economy.

Technical innovation fueled by R&D tax credits is crucial to California’s future. According to an article by Dee Dee Myersdirector of the California Governor’s Office of Business and Economic Development, California accounts for over one-fifth of the total US R&D investments and nearly the largest share of US patents.

Myers contends that these investments “helped create many of the incredible, life-changing technologies we now take for granted – smartphones, new pharmaceutical treatments, manufacturing breakthroughs, and even advancements in agriculture and farming.”

She also noted that R&D creates jobs, especially in highly paid occupations, powering innovation in testing, production and manufacturing. She also adds that 35 other states currently offer their own state-level tax credits. She calls for California to stay competitive and, in order to do so, calls on the importance of the state’s R&D tax credit.

A January 31 article by Cottie Petrie Norris (who represents California’s 74th Assembly District) and Dirksen Lehman (corporate vice president at Edwards Lifesciences) vividly illustrated the role California’s R&D tax credits played in fighting the Covid-19 pandemic:

“When the COVID-19 pandemic first threatened the health of Californians, it was the life sciences industry that answered the call.” They claim that the “common denominator is a robust R&D ecosystem that unleashes rapid innovation, advancement, and development. The pandemic helped reveal how ongoing, robust R&D prepared our life sciences companies to meet the moment.”

Let’s look at the economic contribution that only the life sciences sector makes to California’s economy. The state’s over 3,700 life sciences companies employ more than 350,000 people directly and 1 million indirectly, and in 2019, they generated $191.6 billion in revenue and paid out over $40 billion in wages and more than $17.5 billion in federal, state and local taxes.

California’s focus on R&D tax credits has paid off impressively in economic terms. With innovation fueling its economy, California has created nearly 1 million jobs since February 2021, and in December 2021, it created 25% of the nation’s new jobs. In addition, California is maintaining its position as the national leader in new business starts: 222,000 from January 2020 through March 2021, more than Texas and Florida combined. In that time frame, California was the home of nearly 16% of the US’ new business starts. R&D tax credits can help some startups thrive.

As the world drives deeper and deeper into the 21st century, you can see how technological preparedness can help meet the unexpected challenges of the future. The best way we can do that is to encourage innovation and research via the R&D tax credit. Governor Gavinsom has taken a step in the vitality that the credit can bring to California’s robust economy. I can only hope that other governors are watching Governor Newsom and are being encouraged to do the same. If California—a microcosm of the United States—can use the credit to make its economy excel, I believe other states can, as well.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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