In late 2015, New York City Mayor Bill de Blasio signed into law a three-year extension of NYC’s biotechnology tax credit. The credit, which was set to expire on January 1, 2016, is now available through December 31, 2018. Generally, the biotech tax credit allows emerging biotech companies to claim an annual refundable credit of up to $250,000 for certain costs and expenses. Extension of the credit underscores the city’s continued policy of incentivizing the start-up and early-stage growth of biotech companies.
Qualification for Biotech Tax Credit
A company engaged in biotechnologies is allowed a credit in NYC against the general corporation tax, business corporation tax, or unincorporated business tax for amounts paid or incurred for certain facilities (including upgrades), operations, and employee training, if the biotech company (1) is a “qualified emerging technology company” (“QETC”) and (2) meets certain eligibility requirements.
The following requirements must be met in order for a company to qualify as a QETC:
- The company must be located in NYC (i.e., the five boroughs);
- The company must have total annual product sales of $10 million or less; and
- The company must meet either one of the following two criteria:
- The company’s primary products or services are classified as emerging technologies; or
- The company has research and development (“R&D”) activities in New York State, and its ratio of R&D funds (as defined by the National Science Foundation) to net sales equals or exceeds the average such ratio for all companies surveyed by the National Science Foundation.
It should be noted that the terms “total annual product sales,” “primary products or services,” “emerging technologies,” and “net sales” all have specific meanings under the applicable law. It is important that a taxpayer analyzing whether it may qualify as a QETC consult with a tax professional in interpreting and applying these terms and the rules they relate to.
Once it is determined that the company is a QETC engaged in biotechnologies, in order for the company to be eligible for the $250,000 biotech tax credit, it must satisfy the following additional requirements:
- Have 100 or fewer full-time employees, with at least 75% of those employees employed in NYC;
- Have a ratio of R&D funds to net sales which equals or exceeds 6% during the calendar year ending with or within the taxable year for which the credit is claimed; and
- Have gross revenues (along with the gross revenues of affiliated and related members) that did not exceed $20 million for the calendar year immediately preceding the calendar year ending with or within the taxable year for which the credit is claimed.
Amount of the Credit
The amount of the tax credit, subject to the $250,000 annual limitation, is generally computed as the sum of the following amounts:
- 18% of R&D property, costs, and fees incurred in connection with emerging technology activities;
- 9% of qualified research expenses (specifically defined under the rules) paid or incurred by the taxpayer; and
- 100% of qualified high-technology training expenses (specifically defined under the rules) paid or incurred by the taxpayer, limited to $4,000 per employee per year.
The biotech tax credit may be claimed for a maximum of three consecutive tax years. Any portion of the credit that cannot be applied to the current year’s tax liability may be refunded (without interest) or applied as a payment against next year’s tax.
Therefore, if all of the requirements are met, a biotech company could potentially obtain a cumulative benefit of $750,000 over a three-year period. Such benefit could prove valuable to emerging biotech companies in terms of additional liquidity in the critical early stages.
“Biotech is growing faster than ever, and New York is wisely giving this industry additional tools for growth,” said council member Daniel Garodnick. ”This tax credit has proven successful in giving startups a little help as they strive to stay on the cutting edge.”
For further information, please contact the authors or your regular counsel