Understanding R&D Tax Credits for Biotech, Bioscience, and Pharma

Research and development (R&D) is a huge part of the biotech, bioscience and pharmaceutical industries. Biotech, bioscience, and pharmaceutical companies operate on the forefront of innovation, constantly seeking new solutions to complex problems through cutting-edge technology and scientific research. R&D is the lifeblood of these industries, driving the development of groundbreaking products, formulas, and technologies. These companies can particularly benefit from this credit, given the inherent nature of their research-intensive operations. To capitalize on R&D tax credits, companies must meet specific criteria.

The R&D activities should aim at creating new or improved business components, grounded in technological principles, involve a degree of uncertainty, and follow a systematic process of experimentation. In the realm of biotech, bioscience, and pharmaceuticals, this could encompass a wide range of activities, including drug development, innovative medical devices, genetic research, and more.

What Are R&D Tax Credits?

Since 1981, the U.S. tax code has allowed businesses to lower their tax liability by investing in research and development. The IRS rewards organizations with R&D biotech tax credits. As part of the PATH ACT in 2015, the R&D tax credits became a permanent part of the tax code.

The IRS allows firms to claim 20% of their expenses in R&D for the tax credit. This translates to a percentage of a company’s qualified research expenses (QRE). QREs can include wages, supplies and contract research cost.

Credits for Biotech R&D, Bioscience and Pharma Firms

Not all research activities qualify for the tax credits. Any type of activity that receives funding from a grant or another source doesn’t meet the IRS requirements. Additionally, any activities conducted outside of the United States are ineligible. 

  • Some examples of qualifying activities for biotech R&D tax credits may include: 
    Creating new pharmaceutical drugs
  • Designing new medical devices
  • Using technology to create new drug manufacturing systems
  • Holding clinical trials for pharmaceutical drugs
  • Developing new versions of products to improve shelf stability or reduce side effects
  • Developing new methods for drug delivery

State Credits for R&D

Firms also have other opportunities for tax credits in the R&D biotech field. Startups can lower their payroll tax liability with an increased tax credit of up to $500,000.

States may also reward firms for conducting certain types of R&D. Currently, 36 states offer some type of R&D tax credit. In some cases, your business may be able to qualify for two credits in a tax year, federal and state. Arizona, Arkansas, Connecticut, Delaware, Hawaii, Louisiana, New York, North Dakota, Rhode Island and Virginia allow up to 20% credit for QREs.

Some states only allow a business to get a tax credit as a percentage of the federal allowance. Alaska, Nebraska and Vermont have restrictions on this. Additionally, many states allow individual firms to apply unused credits to future tax liabilities.

Claiming the biotech R&D tax credit may be a confusing process. KBKG helps businesses navigate the idiosyncrasies of the IRS tax code for R&D biosciences and come out ahead. Contact us for more information and to take advantage of this money-saving tax credit.