If your company is running clinical trials, we have good news. Under Section 41 of the Internal Revenue Code (IRC), you can claim a tax credit for a lot of the expenses around those trials. Specifically, they qualify for the R&D tax credit.
That said, the One Big Beautiful Bill Act might change how your company wants to take this credit, so it’s worth looking closely here.
As we come to the tail end of the year and navigate changes from that Act, your company is probably doing some tax planning. We want to make sure you don’t miss out on a potentially major savings opportunity. Here’s your guide to claiming R&D tax credits for your clinical trials, updated to reflect changes from the Act.
Finding qualified research expenses in your clinical trials
IRC § 41 gives companies the opportunity to reduce their tax bill. Specifically, the R&D credit lets you take a percentage of what you spend on qualified research, then subtract that from your income or payroll taxes.
Fortunately for medtech and biotech companies, along with other entities running clinical trials, quite a bit of the cost of those trials counts as a qualified expense here. The Internal Revenue Code lays out four requirements for any expense to qualify:
- The expense was incurred as a direct result of activity your business took to discover information and eliminate uncertainty
- The research is technological in nature (this just means it needs to use hard science, including biological or physical science)
- Your company has plans to use what it learns to develop a new product/service
- The activity is experimental, meaning you’re evaluating alternatives
Phases I–III of most clinical trials easily pass the four-part test, meaning that a lot of the costs for your trial can count toward this credit.
What expenses qualify to count toward the credit
Generally, a cost your business incurs can be applied to the R&D tax credit if it’s a necessary expense for the part of your clinical trial that meets the four-part test. That includes:
- Salary and wages for staff working on the trial (Must be U.S.-based)
- Third Party Contractor Expenses, including payments to Domestic Research Institutions (Labs, Universities, Hospitals, etc.)
- Material (lab consumables, specimens, samples, assay kits, lab animals)
- Equipment (test tubes, implants, dosing devices, surgical supplies)
Record-keeping is particularly important here. Save receipts, obviously, but also track labor hours attached to the trial. Keeping a record of how much time team members spend working on the trial allows you to apply the cost of those hours to your credit. As that log gets created, make sure it specifies how the time was spent. If you’re ever audited, a clear record denoting how salary or wages directly attach to efforts in the trial helps you avoid an issue. There are some time-tracking software you can use, like QuickBooks Time, or a time-tracking platform that is within your HR/Payroll system; for example, Gusto offers this.
Some contract expenses count, too. If you hire a domestic clinical research organization (CRO), 65% of what you pay them might qualify.
You need a few things to claim that 65%, including an in-place agreement before the CRO starts the research, cost to your company even if the research fails (i.e., payment can’t be success-based), and the retention of substantial rights to what the research uncovers. Work with your accountant to see where your trial’s contract expenses can qualify you for tax savings.
What doesn’t qualify
IRC § 41 lays out a few rules that preclude certain costs from being applied to the tax credit. Expenses won’t count if:
- The research is performed anywhere other than the U.S.
- They’re for travel or meals, even if they’re directly associated with the trial
- You’re researching after the beginning of commercial production for the product/service
- They’re for a survey, study, or testing for quality control
- The research is externally funded (e.g., from a grant, contract with another party)
Again, talking with your accountant can help you figure out what expenses do and don’t qualify. If you reach out before you start a new trial, your CPA should be able to help you make decisions to structure the trial in a way that maximizes the size of your credit.
How to apply the R&D credit from your clinical trial
The R&D tax credit doesn’t give you a $1 reduction for every $1 spent on qualified expenses. Instead, IRC § 41 allows you to take a credit of 20% over what the IRS calls your base amount.
There’s some nuance in calculating this (your accountant can help). To give you a general idea, though, your base amount equals your fixed-base percentage multiplied by your average annual gross receipts for the four preceding years. That fixed-base percentage starts low for newer companies and can scale up as your company establishes a history of qualified research expenses and gross receipts. It’s capped at 16%.
There’s also an alternative simplified credit (ASC) formula you can apply here.
There are two specific areas where you can potentially apply the resulting credit:
- Your income taxes
- Up to $500,000 of your payroll taxes (if you’re a what the IRS calls a qualified small business — this guide can help you explore how this works)
Regardless of where you put the credit, having an experienced CPA goes a long way. They can help you figure out your fixed-base percentage, your base amount, and the dollar amount of the credit you can consequently take. They can also file all of the paperwork required to validate this with the IRS.
What the One Big Beautiful Bill Act changes
The Act didn’t impact IRC § 41. It did change a related part of the Internal Revenue Code, though. Under the Act, businesses no longer have to amortize domestic R&D expenses over five years. Instead, per the Act’s changes to IRC § 174, they can deduct those expenses in the tax year in which they were incurred.
You might decide to immediately expense qualified domestic research expenses, then. If you do, it will make your current year deductions larger. That won’t affect your R&D tax credit immediately. But because past years’ qualified research expenses play into your fixed-base percentage, it can impact the size of the credit you can take over time.
Talk to your accountant about this, as you may need to file an accounting method change – form 3115 with your next tax return to take advantage of immediate expensing of qualified domestic R&D Costs.
Maximizing your R&D tax credit from clinical trials
The big takeaway: a lot of the expenses attached to clinical trials in the U.S. qualify the company running the trial for a tax credit. If you’re looking for a way to shrink your tax bill, this can absolutely deliver.
We can help. In fact, we offer R&D credit studies to help companies figure out precisely how much you can save. Contact our team to get started.
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