Biotechnology and the R&D tax credit

There are many industries that qualify for the R&D tax credit as outlined in the Internal Revenue Code Section 41. One industry in particular is the biotechnology industry. There has been a lot of discussion pertaining to this industry this year and throughout this post, we will be breaking down how certain biotech projects and innovations qualify for the credit.

The Four-Part Test

Qualification for any industry begins with the Four-Part Test and the biotech industry is no different. This test outlines the criteria a potentially qualified activity must meet to be deemed as R&D. Qualified activities include: 

  1. Activities meant to create a new or improved business component such as software, product, process, formulation, invention, or technique that result in increased reliability, functionality, performance, or quality.
  2. Activities attempting to eliminate uncertainty
  3. Activities involving a process of experimentation (systematic trial and error).
  4. Activities that are technological in nature (i.e. relying on the hard sciences like physics, chemistry, and engineering).

Examples of Qualified Biotech Activities

This year has shown us that technology can be very useful to the healthcare industry. 

From telehealth visits to contact tracing technology; software development is the engine that powers these innovations. Many Biotech companies have invested time and resources into developing different systems and software products. These projects have the potential to receive tax savings through the R&D tax credit. Some of these projects may include: 

  • Utilizing Bluetooth and GPS technology to develop proximity-based algorithms for contact tracing;
  • Improving the capture and management of patient contact data;
  • Writing code to develop software infrastructure for telehealth visits;
  • Writing code to allow web-bots to guide a potential patient through different questions in order to gather symptoms for doctors; and
  • Developing software algorithms that enable workforce management tools and surveillance systems to work in tangent with each other when it comes to contact tracing.

Qualified Expenses – Wages, Contractors, Cloud-hosting Expenses

Throughout the development process of the above projects, there are several different employees and contractors that conduct qualified activities. These are important expenses that are the primary drivers for your R&D credit. Some examples of employees that historically do R&D activity including Software Developers, Project Managers, and UX/UI designers. The IRS even allows for employees that are directly supervising such as a CTO and directly supporting such as data analysts, to be considered towards the credit. Lastly, another expense that may be claimed towards the credit are costs incurred through development work and testing that is conducted in cloud-based environments.

Schedule a Meeting with the TCH Team

Overall, there are many ways that Biotech companies can take advantage of this credit in order to continue to grow their business and continue to innovate the Healthcare industry schedule a complimentary consultation meeting with the TCH team to discover how your company qualifies!