The Role of R&D Tax Credits in Fueling Biotech Innovation
The biotechnology sector is critical for pushing innovation. Whether it’s for health, agriculture, or the environment, scientific advancement can have a profoundly positive impact.
These advancements are made possible through intensive research and development (R&D) efforts, which are typically risky, experimental, and very expensive.Â
To help fuel innovation in the United States, R&D tax credits are a vital tool in offsetting some of these costs. Let’s delve deeper into the subject to understand how R&D tax credits contribute to biotech innovation in the US.
Understanding R&D Tax Credits
Established under the Economic Recovery Tax Act of 1981, these credits aim to stimulate economic growth by encouraging innovation and technological advancement without worrying about escalating costs.Â
Qualifying activities typically include developing new products, processes, formulas, or technologies, and improving existing ones. Eligible expenses cover wages for R&D personnel, tangible supplies or materials used to conduct research, and US contractor costs who are performing development activities.
What is the benefit?
U.S. R&D tax credits allow biotechs to offset their tax liability with the R&D credit, thereby reducing their overall tax burden.Â
The federal R&D tax credit can be used in the following ways.Â
- Offset against income tax
- Apply the R&D tax credit to reduce the amount of income tax owed by the company.
- Carryback and Carryforward
- Carry unused R&D credits back 1 year or forward up to 20 years.
- Payroll Tax Offset
- Use the R&D credit to offset a portion of the employer’s payroll taxes, such as Social Security and Medicare.
Additionally, many states offer their own R&D tax credits, which can be combined with federal credits to further enhance the overall financial benefit.
Often, it can be challenging to understand how to claim tax credits available to your business. However, hiring an accountant with experience in the biotech sector will enable you to make the right choice for your organization.
What Activities Qualify?
The list of eligible activities in R&D is long and extensive. Here are some broad examples:
- Product development: Including the creation of new pharmaceuticals or biotech products., new medical devices, or diagnostic tools.
- Improving Existing Products: Such as enhancing the efficacy or safety of an existing drug and modifying medical devices to improve performance
- Developing New Processes: Designing new methods for drug manufacturing and creating more efficient processes for genetic modification or sequencing are two examples
- Advancing Technologies: Such as innovations in bioinformatics and computational biology.
- Clinical Trials and Testing: For testing the safety and efficacy of new drugs or therapies including laboratory-based research
If we break these areas down even further, the claimable expenses fall into the following categories:
- Wages: Salaries for employees performing direct, support, or supervision R&D activities.Â
- Contractor Cost: Cost associated with third parties to help with development. The contractor must be located in the U.S.Â
- Supplies: Any lab supplies and non depreciable equipment used in the development and testing phases
- Cloud Hosting: Cloud hosting costs used for a staging environment, not a product environment.Â
How R&D Tax Credits Benefit Biotechs
Since R&D tax credits provide financial relief, additional resources are freed up which allows you to pump more investment into your R&D programs.
Having an improved cash flow can often accelerate the development of innovations. This is especially true for smaller biotechs which typically operate with limited capital. Often, for these organizations, the tax credits provide an essential source of income until additional funding can be acquired.
At Finvisor, our team of qualified experts will help you understand and navigate the complexities around claiming R&D tax credits. We welcome you to get in touch to learn more.
*This blog does not constitute solicitation or provision of legal advice and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction.*
- Last Modified
- August 8, 2024
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