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Ending the engineering gap

By alliantgroup posted 09-20-2016 17:19


For system integrators or other companies falling within the umbrella of the Internet of Things (lOT), the “engineering gap” represents the most troubling of industry trends.

For years, much attention has been given to the lack of qualified STEM (science, technology, engineering and mathematics) workers entering the American workforce. It has been estimated that the United States graduates about 70,000 engineers annually, a significant drop-off from the 600,000 or 350,000 that China and India add, respectively, to their workforces each year. If China graduates eight times as many engineers as the United States, how will STEM-dependent companies such as those in the fields of automation and system integration be able to compete with their foreign competitors?

This decrease in the nation’s STEM labor force has already caught the attention of U.S. policymakers, with the President’s Council of Advisors on Science and Technology stating the need for approximately one million more STEM professionals than the nation is set to produce over the next decade to ensure the country retains “its historical preeminence in science and technology.” Policymakers on both sides of the aisle have offered solutions, from more STEM-based education programs to stronger incentives that encourage companies to hire homegrown STEM-talent rather than outsource overseas.

In fact, the most significant of these policy efforts occurred just this past December, when Congress passed, and the President signed into law, a bill that made permanent and expanded the Research and Development (R&D) Tax Credit—the premiere job-creating incentive for companies in the science and technology based sectors.

The R&D Tax Credit: Creating and Keeping STEM Workers on American Shores

For those unfamiliar with the R&D Tax Credit, an incentive that produces an estimated $10 billion in annual tax savings for U.S. businesses, it is certainly not new and has been a fixture of the tax code since the 1980s. However, over the years the credit has evolved into an anti-outsourcing incentive, one that has allowed companies from a broad range of industries to qualify for the credit.

Today, the R&D Tax Credit is first and foremost a job-creating incentive, one that was designed to reward companies for employing and keeping technical talent on American shores. Despite popular misconceptions, the credit it isn’t just for Apple, Google or other software and tech giants. It isn’t just for patents or cutting-edge medical research. No, eligibility for the credit is also very much tied to the applied sciences, or the everyday, technical problem-solving companies (no matter their size) must go through to improve a product or process.

It is for this reason that system integrators are among the absolute best candidates for the credit. For the technical, trial-and-error work performed on the factory floor to enhance a production process, for the iterative steps devised by engineers to enhance the efficiency of an automated process, or for the design and programming necessary to implement sophisticated control systems and other industrial processes, companies can be rewarded handsomely with a significant reduction in their annual tax bill. As a result, the credit provides these companies the cash needed to hire even more technical talent or for further company-wide reinvestment.

Real-World Application

To show how powerful the credit can be, let’s take a look at a real-world example. For one year of qualifying projects, a system integration company with an annual revenue of $6.5 million received more than $161,000 in federal and state R&D tax credits. Among this company’s many qualifying projects included the design and development of a new control system platform for a bio washer tunnel.

Specifically, this company needed to develop a new platform that would be compatible with the one already in place, which required an investment of time in redesigning, coding, programming and testing for upgrades in the older control system to a newer platform. This company also developed alternative PLC designs that would be able to communicate with the existing temperature controls, ultimately leading to the production of a new and fully compatible control system platform.

Enhancing the efficiency of a control, automated or industrial system led the company to qualify for the R&D Tax Credit. This is a very traditional pathway that many system integrators take toward claiming the credit.  

Pro-Taxpayer Changes

As stated before, the credit has evolved over the years for the benefit of U.S. businesses, with the most recent changes coming as a result of legislation from this past December. Along with the credit’s permanency, this bill contained two major modifications designed to expand access to the credit to small and mid-sized businesses. 

The first modification—the AMT turn-off—allows small businesses (defined in this instance as businesses with less than $50 million in gross receipts) to be able to claim the credit against their alternative minimum tax (AMT). Without getting too involved in the complexities of the tax code, the important takeaway for business owners is that the AMT floor was the single greatest barrier preventing eligible companies from benefiting from the R&D Tax Credit. Now, this provision will level the playing field between big corporations and smaller businesses, thereby allowing the latter group to benefit from all the credits that they are entitled to under the tax code.

The second modification—the startup provision—allows businesses with gross receipts of less than $5 million a year to claim the credit (capped at $250,000) against their 2017 payroll taxes. Traditionally, a business must be profitable (i.e. paying federal income taxes) to claim the R&D Tax Credit, but this new provision solves that issue, further allowing smaller and newer companies to take advantage of the credit.

Combined together, these latest changes have the potential to put significant value back into the pockets of system integrators across the country, including CSIA members, providing the cash needed to attract the best technical talent and push back against both the Engineering Gap and the nation’s STEM-shortage. It could make all of the difference in adding the best talent into your business.

Tracy Lustyan is alliantgroup Managing Director.