Executive summary
New York City life sciences companies have second chance with biotech credit
On Dec. 4, 2023, New York City Mayor Eric Adams signed legislation reviving a tax credit for qualified emerging technology companies (QTECs). The Biotechnology Tax Credit may be used to offset the general corporation tax, the unincorporated business tax and the business corporation tax. The enacted law has immediate effect, making the credit available for eligible taxpayers for tax periods beginning on or after Jan. 1, 2023, and prior to Jan. 1, 2026.
Biotech credit revived
The credit is intended to incentivize small life sciences companies to create jobs and increase investment in New York City. The path for the New York City Biotechnology Tax Credit was paved by legislation signed by New York Gov. Kathy Hochul earlier this year. Among other changes to the corporation business tax, Senate Bill 4009C/Assembly Bill 03009-C enacted on May 3, 2023, authorized New York City to provide a biotechnology tax credit for a three-year period beginning Jan. 1, 2023.
A QTEC includes companies engaged in biotechnologies in New York City and that meet certain criteria. The company must either have a ratio of research and development (R&D) funds to net sales that is at least equal to the average of all companies surveyed by the National Science Foundation, or have their primary products or services classified as emerging technologies. In either case, the company must not have total annual product sales exceeding $10 million. Additionally, a company will only be eligible for the credit if the QTEC:
- Employs 100 full-time employees or less, with at least 75% of employees based in NYC;
- Has a ratio of R&D to net sales of at least 6%;
- Has gross revenue not exceeding $20 million in the immediately preceding year; and
Applications for the 2023 tax year must be submitted by Jan. 15 following the calendar year for which the QTEC is claiming the credit (i.e., Jan. 16, 2024 for the 2023 tax year). Taxpayers will be notified by the New York City Department of Finance with the amount of approved credit.
The credit is calculated as the sum of the following facilities, operations and training expenses:
- Facilities: 18% of the cost or basis of R&D property purchased by the taxpayer and placed into service during the year;
- Operations: 9% of the qualified research expenses paid or incurred by the QTEC; and
- Training: 100% of high-technology training expenses paid or incurred by the QTEC, limited to $4,000 per employee annually.
The training expenses qualify only to the extent that they are incurred for full-time employees and those employees remain employed for at least 180 days following the training.
The credit per taxpayer is capped at $250,000 annually, with a total available credit of $3 million per year. Any portion of the credit which cannot be used to offset the QTEC’s current year tax liability may be refunded.
In order to earn the maximum amount for eligible facilities, operational and training expenses, the taxpayer must demonstrate that the company’s average number of full-time employees in New York City is at least 105% of the number of full-time New York City employees in the immediately preceding calendar year for which the credit is claimed. Otherwise, the taxpayer is limited to 50% of the credit calculated for eligible expenses as described above and a reduced maximum credit amount.
Takeaways
The deadline to apply for the Biotechnology Tax Credit for 2023 is fast approaching. Taxpayers engaged in emerging biotechnology in New York City should consult with their state and local tax advisors to determine their eligibility for the credit, and to quantify eligible facilities, operational and training costs.
The New York City Biotechnology Tax Credit may help to alleviate some of the burden taxpayers in the life science industry are experiencing over the impact of section 174. Effective for tax years beginning in 2022, section 174 as amended by the Tax Cuts and Jobs Act (TCJA) requires taxpayers to capitalize and amortize certain R&D expenses instead of immediately expensing such items in the year the expenses are incurred. New York City conforms to section 174 as enacted by the TCJA, so any available Biotechnology Tax Credit may help to offset accelerated New York City tax due under the amended section 174 rules.
