Because our team here at ShayCPA specializes in providing accounting services to tech companies, we spend a lot of time working with Section 41 of the Internal Revenue Code. IRC § 41 is what makes it possible to claim a tax credit for research and development, including clinical trials.
In fact, this credit has pretty far-reaching implications. If you’re a biotech or medtech company, you likely need to take on clinical trials before a product goes to market. This tax credit may be able to help you bring down your business’s out-of-pocket expenses for those trials. In fact, that credit might help you reduce your tax liability (read: keep more money in your company coffers) to the tune of $500,000 each year.
If that sounds appealing, it’s time to dig into the details of Section 41.
Getting a tax credit for qualified research expenses
IRC § 41 lets you take a tax credit for a percentage (more on that later) of every dollar you spend on what the IRS calls “qualified research.” For something to count in that category, it needs to meet four criteria:
- Your business completes the activity with the intent of discovering information
- The research is technological in nature
- You intend to use what you learn in a new product or service
- It’s experimental
Obviously, most clinical trials can easily meet these criteria. As a result, your company may actually have an easier time claiming a tax credit for your qualified research than other company types.
Some common undertakings that usually qualify include:
- Formulating a new medication
- Figuring out how to manufacture new medication
- Creating new medical devices
- Designing new drug delivery methods
In other words, expenses incurred during Phases I–III of your clinical development can usually qualify you for this tax credit.
Contract expenses can potentially qualify, too
If you hire a third party to conduct your clinical trial, you may still be able to claim a tax credit for a portion of that expense. Specifically, if you hire a U.S.-based clinical research organization (CRO), you should still be able to get a credit for a portion (65%) of what you pay to that contractor.
If, for example, you hire a CRO to help you find and screen trial participants, you can most likely count 65% of what you pay the CRO as you tally up your qualified research expenses at the end of the tax year. Be diligent in your receipt-keeping here — it can make a big difference.
What can’t qualify
There are a few caveats when it comes to claiming clinical trial expenses. For your research to qualify for this tax credit, it needs to be performed domestically. You also can’t be researching adapting an existing product or continuing research after the product has already become commercially available.
Section 41 also specifically precludes surveys and studies, including “routine or ordinary testing or inspection for quality control.” In other words, your research needs to be undertaken with the goal of developing a new product or service, not maintaining or iterating a current one.
Finally, biotech and medtech companies should also know that if your research is funded (e.g., by a grant or a contract with another party), it can’t qualify.
How much you can claim
You can generally claim a credit for the cost of your clinical trial, from the supplies you need to the salaries of the R&D specialists running it. (If you want to explore using this credit to reduce your payroll tax liability, we’ve got a guide you can check out.)
Keep receipts for any supplies you procure for the trial. Also, track how many hours your various team members dedicate to the trial. When you apply for the credit, you’ll want to clearly denote their job title. Some employee titles that often qualify to have their salaries count toward this tax credit include:
- Research coordinators
- Clinical trial associates/coordinators/specialists/managers
- Pharmacologists/pharmacists
- Physicians
- Research nurses
- Data managers
- Principal investigators
Again, diligent tracking of your research expenses goes a long way.
Be advised, though, that this isn’t a $1-to-$1 credit.
Specifically, you can claim 20% of the excess of your qualified research expenses over your base amount. Your base amount is determined by calculating the average of your annual gross R&D receipts from the previous four tax years.
Getting started with an R&D credit study
Figuring out how much you can claim under Section 41 can get tricky fast. Fortunately, we can help. With a fixed-fee R&D credit study run by our experienced CPAs, you get a clear idea of what this tax credit can do for your company.
Plus, we do everything we can to make this study as painless as possible for you. We will need 30 minutes of your time on the front end to get teed up, but we take it from there. We can create an easy way for you to get us the required documentation and we crunch the numbers and file the paperwork ourselves. At the end, you get a comprehensive R&D study report so you can know precisely what to expect of this opportunity to lower your company’s tax liability.
If you’re already working with a different accounting firm for your tax filings, no sweat. We can provide them with the completed Form 6765, the paperwork you need to file to claim this credit.
Finally, we don’t invoice you for the R&D credit study right away. We know that cash flow runs tight at a lot of tech companies, especially when you have clinical trials going on. To ease that as much as we can, you won’t see an invoice from us until your R&D tax credit hits your bank.
Long story short, if your company runs clinical trials, you can almost certainly claim the resulting expenses as a tax credit. To find out exactly how much, don’t hesitate to contact our team to get started with an R&D credit study. We’re also here to help you save the right receipts and get the paperwork squared away to file with the IRS to claim your credit. For help maximizing this opportunity to minimize your company’s taxes, get in touch.