New York Advisory Opinion TSB-A-14(1)C: Do purchased patents, prototypes and know-how qualify for the QETC facilities, operations and training credit as research and development property or as qualified research expenses?
Plain-English summary
A would-be qualified emerging technology company (QETC) bought from an unrelated company three patents plus prototypes, designs, manufacturing know-how and trade secrets relating to a hollow metal golf ball. It asked whether those purchases qualify for the QETC facilities, operations and training credit (Tax Law § 210.12-G), either as research and development property (an 18% credit) or as qualified research expenses (a 9% credit).
The Department split the answer. The R&D-property component requires tangible property (Article 9-A defines tangible personal property in Tax Law § 208.11 as corporeal property like machinery and goods, not patents, know-how, or other intangibles). So the patents, trade secrets and know-how — intangibles — do not qualify. The prototypes and designs of tangible property may qualify, but only if used for R&D "in the experimental or laboratory sense," judged by the IRC § 174 standard: information available didn't establish how to develop or improve the product (an uncertainty existed) and the property is used to resolve that uncertainty. If a contract doesn't itemize qualifying versus non-qualifying property, a reasonable allocation of the price is allowed. As for qualified research expenses (9%), those cover in-house research costs; because the petitioner bought the patents and property rather than developing them in house, they don't qualify as qualified research expenses.
What this means for you
Emerging technology companies claiming the QETC credit
Buying intellectual property is not the same as doing research. Patents, trade secrets and know-how are intangible and fall outside the R&D-property credit; only tangible items (e.g., prototypes) used to resolve genuine technical uncertainty qualify. And the qualified-research-expense piece rewards in-house research, not acquired IP.
Accountants and tax professionals
Separate tangible from intangible at the contract level and allocate the price reasonably when a purchase mixes them. Apply the IRC § 174 "experimental or laboratory sense" test (uncertainty plus activity to resolve it) to any tangible prototypes, and keep records showing whether research costs were incurred in house.
Common questions
Q: Do purchased patents qualify for the QETC R&D-property credit?
A: No. Patents and other intangibles are not tangible property, so they fall outside the research-and-development property component.
Q: Can purchased prototypes qualify?
A: Possibly, if they are tangible property used for research and development in the experimental or laboratory sense under the IRC § 174 standard.
Q: Do the purchased items count as qualified research expenses?
A: No. Those cover in-house research; property bought from another company was not developed in house.
Citations and references
- Tax Law § 210.12-G (QETC facilities, operations and training credit; 18% R&D property, 9% qualified research expenses, $250,000 cap)
- Tax Law § 210.12(b) (research and development property must be tangible); Tax Law § 208.11 (tangible personal property)
- IRC § 179(d) (acquired by purchase); IRC § 174 (experimental or laboratory sense; uncertainty test) — Union Carbide, 26 CFR 1.174-2
- Public Authorities Law § 3102-e (QETC definition); TSB-M-12(9)C, (8)I
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2014.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a14_1c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-14(1)C
Corporation Tax
January 27, 2014
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C121120A
The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether certain purchases qualify for the qualified
emerging technology companies (“QETC”) facilities, operations and training credit for research
and development property or qualified research expenses. We conclude that the purchases will
qualify as research and development property to the extent the purchases constitute tangible
property used in research and development. The purchases will not qualify as qualified research
expenses.
Facts
In 2011, Petitioner purchased from an unrelated company three patents, prototypes,
designs, manufacturing know-how, trade secrets, and other technological know-how related to
the production of the hollow metal golf ball.
Analysis
For taxable years ending before January 1, 2012, Tax Law § 210.12-G provides that a
QETC facilities, operations and training credit may be claimed by an eligible taxpayer that meets
the definition of a QETC under Public Authorities Law (“PAL”) § 3102-e and specifically for
the activities referenced under PAL § 3102-e(1)(b). To qualify as a QETC specifically for
activities referenced in PAL § 3102-e(1)(b), a business must meet the primary products or
services test. See TSB-M-12(9)C,(8)I. Additional criteria for the credit are that a taxpayer must
have: (1) 100 or fewer full-time employees of which at least 75% of those employees are
employed in New York; (2) a ratio of research and development funds to net sales of 6% or
greater during the taxable year; and (3) gross revenues, including gross revenues of affiliates and
related members, of no more than $20 million for the taxable year immediately preceding the
year the taxpayer is allowed to claim the credit. See Tax Law § 210.12-G(1)(b). This opinion
does not address whether or not the Petitioner qualifies as a QETC under the PAL and for the
activities covered by PAL § 3102-e(1)(b), and meets the eligibility requirements required by Tax
Law § 210.12-G(1)(b), and assumes for purposes of this opinion that Petitioner meets these
requirements.
The credit is the sum of the following amounts:
(1) 18% of the cost or other basis for federal income tax purposes of research and
development property;
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(2) 9% of qualified research expenses paid or incurred by the taxpayer during the taxable
year; and
(3) 100% of qualified high technology training expenses.
(c) (d) & (e).
See Tax Law § 210.12-G(1)
The credit may not exceed $250,000 per taxable year. See Tax Law § 210.12-G(1)(f).
The credit amount for research and development property is 18% of the cost or other
basis for federal income tax purposes of research and development property, as defined in Tax
Law § 210.12(b), that is acquired by purchase under Tax Law § 179(d), and is placed in service
during the taxable year. Tax Law § 210.12(b) requires that the property be tangible property and
be used for purposes of research and development in the experimental or laboratory sense. Also,
for purposes of the research and development property portion of the credit, an eligible taxpayer
will be allowed a credit for 18% of the: (1) cost or other basis for federal income tax purposes
of property used in the testing or inspection of materials and products; (2) costs or expenses
associated with quality control of the research and development; (3) fees for the use of
sophisticated technology facilities and processes; and (4) fees for production or eventual
commercial distribution of materials and products from the activities of an eligible taxpayer
where the activities fall under the activities in PAL § 3102-e(1)(b).
Petitioner’s property purchases consist of three patents, prototypes, designs,
manufacturing know-how, trade secrets and other technological know-how related to the
production of the hollow metal golf ball. As stated above, the credit for research and
development property requires that the property be tangible property. Although the term
“tangible property” is not defined in the QETC facilities, training and credit section, the general
definition section of Article 9-A defines “tangible personal property” as corporeal personal
property, such as machinery, tools, implements, goods, wares and merchandise and does not
mean money, deposits in banks, shares in stock, bonds, notes, credits or evidences of an interest
in property and evidences of debt. See Tax Law § 208.11.
Therefore, Petitioner’s purchase of intangible property, including the patents, trade
secrets, manufacturing know how and other technical know-how, will not qualify as research and
development property. Petitioner’s purchase of the prototypes and designs of tangible property
may qualify as research and development property if the property is used for research and
development in the experimental or laboratory sense. The case law interpreting the federal
expense deduction for research and experimental expenditures in IRC § 174 provides guidance
on how to interpret this standard. Property is used for research and development in the
experimental or laboratory sense if (1) the information available to the Petitioner does not
establish the capability or method for developing or improving a product or process (i.e. an
uncertainty exists); and (2) the property is used in an activity intended to discover information
that would eliminate this uncertainty. See Union Carbide Corp and Subsidiaries v. C.I.R., 97
T.C.M. 1207 (2009), citing 26 CFR 1.174-2. Also, if the contract for the purchase of property
did not itemize amounts for qualifying and non-qualifying research and development property,
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Petitioner may allocate a reasonable portion of the purchase price to the qualifying property
amounts.
The credit amount for “qualified research expenses” is applicable to expenses associated
with in-house research and processes, and costs associated with the dissemination of the results
of the products that directly result from those research and development activities. See Tax Law
§ 210.12-G(1)(d). In addition, certain costs associated with patents, such as costs associated with
the preparation of patent applications and patent application fees, qualify However, because
Petitioner purchased the patents and other property from another company, and the property was
not developed and created “in house” by Petitioner, the expenses do not qualify as qualified
research expenses.
DATED: January 27, 2014
NOTE:
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the person
or entity to whom it is issued and only if the person or entity fully and accurately
describes all relevant facts. An Advisory Opinion is based on the law, regulations, and
Department policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion. The information provided in this document does
not cover every situation and is not intended to replace the law or change its meaning.