R&D Tax Credits for Biotech Companies
Biotech companies are in the business of innovation. As such, they are ideal candidates for the research and development tax credit. The federal R&D tax credit was essentially authorized for the specific purpose of encouraging the research and development of new products and processes. That said, a majority of biotech developers and companies fail to take advantage of America’s largest tax incentive. In 2016 alone, nearly $16 billion in R&D tax credits were claimed, yet biotech companies continue to leave money on the table by not claiming the research and development tax credits made available to them. The primary reasons biotech companies aren’t claiming R&D tax credits are they either don’t know the credits exist or don’t believe they qualify to claim the R&D tax credits. The best way to learn whether your company’s biotech activities are R&D tax credit eligible is to work with an experienced and well-qualified R&D tax credit consultant. Schedule a free consultation with Clarus R+D to learn more about the benefits of the R&D tax credit program or to discuss whether you are eligible to claim the credit. Clarus’ technology-driven solution empowers companies to fuel their growth with America’s largest tax incentive.
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Biotech companies can claim R&D tax credits
The R&D tax credit is the biggest tax incentive available to developers of new biotechnology. Since its introduction in 1981, the R&D tax credit has expanded so that more and more biotech companies are able to claim the tax credits. In order for your biotech company to be eligible to qualify for the R&D tax credit, it must engage in certain qualified research activities.
Clarus R+D has worked with biotech companies across the country to help them claim the R&D tax credit. Examples of biotechnology activities that may be eligible for the R&D tax incentive include:
- Developing and testing new pharmaceuticals
- Design and manufacturing of prototype medical devices, drug delivery systems, or pharmaceutical packaging apparatuses
- Development and testing new therapies, biologics, or medical compounds
- Improving existing products to increase shelf life
- Improving existing products to reduce side effects
- Improving existing products to enhance effectiveness
- Conducting clinical tests to satisfy government regulatory requirements prior to commercialization
- Support of direct research activities, such as quality testing, maintaining lab equipment, data collection, and regulatory compliance work
- Design and development of new or improved scaled-up manufacturing processes
- Designing and developing certain hardware and software systems for use in research and clinical development
- Developing new uses for existing drugs
- Designing a new production system or new manufacturing techniques
- Developing technology for compliance with regulatory requirements
- Developing technology to produce pharmaceuticals more cost effectively
You don’t have to be among the largest biotech companies to take advantage of the research and development tax credit. Small biotech companies and startups are even eligible to claim the R&D tax credit. In fact, recent changes to the applicable laws have made it easier than ever for more developers of new biotechnology to take advantage of the R&D tax credit.
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Benefits of R&D tax credits for biotech companies
The research and development tax credit is a government-sponsored tax incentive available to companies who conduct research and development within the United States. The credit was implemented as a Congressional response to the decline in research spending which negatively impacted the Country’s economic growth, productivity gains, and overall global competitiveness. The R&D tax credit was initially implemented in 1981 and has since been reauthorized several times. In 2015, when the Protecting Americans from Tax Hikes (PATH) Act was adopted, the Research and Development (R&D) credit became a permanent part of the tax code
Many biotech companies assume the R&D tax credit is available only to the big biotech companies. This, of course, is not the case. You don’t have to be as large as Moderna or Vertex to be eligible for the credit. A biotech company is eligible for the incentive as long as they are engaged in qualified research activities, regardless of the size of their company. Under the current tax code, any company that develops or improves products or processes may be eligible for the credit. The number of biotech developers who engage in eligible activities is ever-increasing; biotechnology is, by its very nature, innovative. Clarus R+D is your tax credit consultant of choice to help your biotech company take advantage of the research and development tax incentive.
Many biotech developers and companies are unaware of the tremendous benefits of R&D tax credits. For most biotech companies, the credit is worth 7-10% of qualified research expenses. This is a dollar-for-dollar credit against taxes owed. Plus, it carries forward 20 years. For startups, applying the credit against payroll taxes is a valuable, non-dilutive funding opportunity. Eligible expenses for the R&D tax credit include U.S.-based wages, contracting, and supply costs. Most typically, wages are the largest qualified expense, but there must be nexus between the expense and qualified project. Additionally, most states offer an R&D tax credit that can supplement the federal R&D tax credit.
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Biotech innovation and R&D tax credit eligibility
Working with a professional R&D tax credit consultant, like Clarus R+D, is the best way for you to determine your tax credit eligibility. In order to be eligible for the research and development tax credit, your biotech company must engage in qualified research. Qualified research generally is private sector or commercially driven development intended to yield innovation within a scientific or technological field. The following four-part test determines whether an activity is considered qualified research and, thus, eligible for the R&D tax credit.
The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty
The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation
The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as systematic trial and error process.
Technological in Nature
The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement. Research activities that qualify for R&D tax credits must be conducted in the U.S. If your business does any of the following, it likely qualifies for the R&D tax credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
Even if your work passes the four-part test, there are a few exclusions to the R&D tax credit. Expenses incurred under the exclusions will not qualify for the incentive. Some of these already appear in the four-part test, including the need to rely on hard sciences. The activity must take place in the U.S. and cannot include routine data collection or market research. Also, activities cannot receive funding from an unrelated third party because your company might not retain ownership of the resulting intellectual property.
Clarus R+D will work with you to help you understand what is considered qualified research for purposes of determining R&D tax credit eligibility.
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R&D tax credits: Biotechnology and innovation
Biotechnology is a broad area of biology. Defined most simply, biotech is the technology of biology. Biotechnology harnesses cellular and biomolecular processes to develop technologies and products that help improve our lives. It is the branch of applied science that utilizes living organisms and their derivatives in order to produce those very products and processes. The production of those products and processes is, in and of itself, innovative.
The R&D tax credit was introduced as a means to spur innovation. There is, perhaps, no other field that embraces innovation quite like biotechnology. Since biotech encompasses such a broad area of biology, there are many careers within the biotechnology industry where qualified research is likely to occur.
Examples of careers within the field of biotechnology that might engage in qualified research activities.
- Biomedical engineer
- Environmental engineer
- Analytical chemist
- Analytical scientist
- Lead drug product engineer
- Mechanical engineer
- Process engineer
- Quality assurance/control
- Clinical research
- Software engineering
- Environmental scientist
- Sales and technical support
- Business management
- Project management
- Integration manager
- Quality Assurance/Control
- Research Scientist
- Validation Engineer
- R&D scientist
Clarus R + D will work with you and your team to help determine if your biotech activities satisfy the four-part eligibility test and are, therefore eligible.
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R&D tax credit consultants: What to expect
Working with a professional R&D tax credit advisor is the best way to determine eligibility and maximize your benefit. Here is what you can expect by selecting Clarus R+D as your R&D tax credit consultants:
- Clarus R+D provides a team of professionals with expert credentials able to answer all your R&D tax credit questions.
- Our proprietary software streamlines R&D studies which maximizes your ROI.
- Clarus has expert knowledge of the IRS regulations relating to the research and development tax credit, IRC Section 41, as well as the regulations pertaining to state-specific research and development credits.
- Clarus has extensive experience in recognizing qualified research activities and expenditures.
- Our time-proven methodology has yielded maximum benefits to our clients.
- The Clarus team has helped hundreds of clients claim millions in R&D tax credits.
- We place emphasis on helping growth businesses take advantage of the tax incentive.
- Clarus does the work for you; our web-based app allows you to enter information at your own pace.
- We have extensive IRS and state audit experience and provide our clients with audit support.
- We have maintained an exceptional success rate in applying for the R&D tax credit.
- We work directly with our clients and their respective accounting firm and payroll processor.
- Our process saves valuable time and resources within the engineering and finance departments.
- Our fees are very competitive.
- Our performance, success rate, and unparalleled quality of service result in high client loyalty.
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ABOUT CLARUS R+DWith custom software backed by a team of tax experts, Clarus R+D specializes in tax credits for growth businesses. Our technology-driven solution simplifies the process, maximizes benefit, and ensures compliance. We partner with accounting firms, financial advisors, investors, payroll providers, and more.