Where to start with the R&D tax credit for life sciences companies

microscopes on a laboratory bench

When you’re just getting off the ground, you want to take advantage of any financial benefits possible. Life sciences companies have a particular one that can be incredibly useful, especially when just getting started: the research and experimentation tax credit.

Your costs as a life sciences company are probably going to be considerably different compared to the average company. You might pay for cloud services or software, but you might also be paying for lab equipment on a regular basis. The average tech startup isn’t buying thousands of carefully calibrated glass instruments. Each broken piece of glass can add up — so you want to ensure you’re using every benefit you can get.

How does the R&D tax credit work?

Not all research is locked up in a lab at a research institution. You might be able to move considerably faster if you’re running a life sciences business instead of out of a research lab in a basement. But it also means you’re on your own when it comes to keeping your costs under control. Just like other small business incentives, there are ways to take advantage of tax credits to save money.

Like other credits, the R&D tax credit was created as a way to spur research and economic development. The R&D tax credit, formally called the Research & Experimentation Tax Credit, gives businesses that focus on research a tax credit. Life sciences is one of the big areas that can take advantage of this credit. In fact, a lot of things you might not consider research outright would actually fall under the qualifications.

There are a few things you have to fulfill to ensure your research and work qualifies for the credit. There are certain specific phrases that show up often, but the rough framework is pretty intuitive when you think about how things work in the industry.

  • The work you are doing must be technological in nature. So you have to be attacking a technical problem that falls under biology, physics, engineering, and so on and so forth. If you’re doing scientific research, you’re probably already doing this. We’ll get into some examples of what wouldn’t qualify below.
  • Your work should eliminate uncertainty, which is a term thrown around a lot but also falls under a test. You should be doing work that is trying to discover new ways to develop or improve something.
  • You have to be following a process of experimentation. This is another test that’s exactly like it sounds. You’re probably already doing this — come up with a hypothesis, test it, find the results, and repeat the cycle.
  • Then, you basically have to show that you’re intending to develop a new or improved component that will be part of your business.

As a life sciences company, there’s a good chance you’re doing all of this without knowing the formal definitions. Still, you want to ensure you’re covered. As with anything else, make sure all your operations and expenses are very well-documented.

What are some things to look for in my life sciences company?

While you might consider yourself a life sciences company, it’s important to note that there are some specific boxes you need to check. For example, the most recent IRS form 6765 indicates some activities that aren’t suitable for the R&D tax credit. It’s a bit of a laundry list, but it’s still important:

  • Research conducted after the beginning of commercial production.
  • Research adapting an existing product or process to a particular customer’s need.
  • Duplication of an existing product or process.
  • Surveys or studies.
  • Research relating to certain internal-use computer software.
  • Research conducted outside the United States, Puerto Rico, or a U.S. possession.
  • Research in the social sciences, arts, or humanities.
  • Research funded by another person (or governmental entity).

Should you fall under the requirements above and don’t sit somewhere in the points below, you’ll want to explore the R&D tax credit. Many accounting firms will help you figure out the benefits of the R&D tax credit for your company. So, as you mature, it may make more sense to offload the duties to an accounting firm that will help you maximize the value you can get out of the R&D tax credit.

Photo credit: Ousa Chea on Unsplash

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