R&D Tax Incentive Opportunities for Life Sciences Companies
A Point of View
In an era where life sciences companies are rapidly witnessing industry consolidation, global expansion, off-shoring of manufacturing and clinical trials, and increased scrutiny of the R&D process, the research tax credit is more important than ever.
Since 1981, taxpayers have been able to reduce the cost of R&D through the research and development tax credit. The credit is by no means a secret or new — considering that more than six billion dollars in R&D credits were claimed in 2005. The research credit is nonetheless widely misunderstood by many companies and their executive teams due to the ever changing landscape of interpretive rulings, regulations and documentation standards. This article will help clarify several significant issues and time sensitive tax opportunities available to life sciences companies.
A current industry trend in life sciences is the movement of manufacturing facilities and clinical activities offshore. Companies are increasingly moving production facilities to an emerging market for lower production costs, or moving production to other jurisdictions for protection and leniency of intellectual property. Increasingly, life sciences companies are also conducting clinical trials outside the US either for cost benefits or for access to certain patient populations. For outsourcing R&D activities to be qualified for the R&D tax credit, there are specific requirements that must be met. These requirements generally require significant activity or resources to be located in the U.S.
Alternatively, a unique need to go outside of the US to conduct an activity, for example with orphan drug clinical trials, must be substantiated. The purpose of the tax is to support the US-based R&D industry and certain requirements exist around the tax credit to ensure that the targeted benefit is realized as much as possible.
With that stated, the tax credit benefits can be significant, though the enforcement and documentation requirements around the R&D tax credit can be burdensome. Recognizing the difficulties taxpayers faced in substantiating research spending (especially past spending) led to the enactment of the Alternative Simplified Credit (ASC). ASC eliminates the need to substantiate research spending occurring many years ago. This new credit option is particularly beneficial for life sciences companies, which often lack the time and resources to effectively document the R&D process in real-time and, thus, may not have the records often requested by IRS examiners to substantiate the traditional base amount. This new policy offers an additional avenue that life science companies can explore to minimize the net cost of their R&D programs.
This article touches broadly on the issues, qualifications, and various complexities of the tax calculation. It includes a general overview of the tax credit, as well as direction on how to effectively utilize the tax credit. Specific impacts of the credit on off-shoring, manufacturing, and orphan drug research are also discussed. This article will help companies create a regulatory strategy that can lessen their tax burden and improve their financial positioning for R&D.
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