The Benefits of the R&D Tax Credit for Healthcare Entities

The Federal Research Tax Credit (R&D tax credit) provides substantial tax advantages for healthcare companies but many fail to leverage this opportunity. The R&D tax credit rewards companies for increasing investments in research and development and provides a dollar-for-dollar offset of federal income or payroll taxes paid or owed. This credit can be applied to future or past income tax liabilities or, potentially, even to payroll taxes for some startups.

The R&D Tax Credit

The R&D tax credit was enacted by Congress in 1981 to serve as a federal tax incentive for businesses to expand their investments in research and development. Qualified taxpayers can utilize this credit to reduce their tax liability based on their annual Qualified Research Expenses (QREs), under Section 41 of the Internal Revenue Code. QREs come from certain expenses paid or incurred while conducting Qualified Research Activities (QRAs).

The Federal Research Tax Credit was intended to offset federal income taxes owned by the entity paying or incurring the Qualified Research Expenses. If there is no tax liability, the taxpayer can carry forward the credit for future use, up to 20 years, or retroactively apply it to the prior year. Qualifying startups can use their R&D tax credit against their share of payroll taxes. Corporations (C-corps) may be able to transfer unused R&D tax credits to a buyer during their sale or exit, with certain restrictions.

Healthcare companies who qualify should maintain good records and ensure they have a detailed understanding of which expenses are considered QREs. Companies must be able to demonstrate how their activities meet the standard of QRAs. When preparing documentation, it must include project descriptions, technical design documents, project timelines, and financial records related to the R&D expenditures.

Companies must be able to clearly document and substantiate the timeline for their research and development. This significantly influences on the size of any research tax credit claim. Enlisting the help of a tax professional with R&D tax credit expertise will help to ensure that the proper documentation is created and retained to meet all guidelines.

What Counts as QRAs?

Qualified Research Activities consist of a wide range of activities and are not limited to basic research, new product development, or laboratory research. Activities related to the improvement or enhancement of existing products, software, or manufacturing and transformation processes also qualify as QRAs. Below are a few examples of activities that could qualify in the healthcare industry.

These pharmaceutical activities may qualify for the R&D tax credit:

• Conducting US based clinical trials.
• Developing new drugs and therapies.
• Developing techniques to manufacture new drugs.
• Improving the efficacy and safety of certain drugs or medical devices.

These healthcare related activities may qualify for the R&D tax credit for developing or enhancing:

• New software to enable physicians to deliver care services.
• Technology to improve telemedicine, compliance with HIPAA, patient uses engagement, or other industry standards.
• Communication protocols, APIs, and other methods of sharing information.
• Software applications like patient portals, appointment systems, or billing platforms.
• Electronic medical record solutions systems.
• Payer/provider analytics or data tools.
• Internet of Things (IoT) devices for medical use.

Additionally, there are several other expenses that could potentially qualify for the R&D tax credit. Companies should consider the wages of employees or contractors who assist with any of the qualifying activities above as additional costs that could potentially qualify. Any contract research expenses or expenses related to cloud-based environments used for R&D could also qualify.

Conclusion

Healthcare organizations can benefit substantially from taking advantage of the federal R&D tax credit to reduce the cost of their research and development activities. This allows for more resources to be allocated to innovating and improving patient care. However, it is important to consult a tax professional who specializes in this area to ensure full compliance and maximize any benefits.

The Baldwin CPAs tax team has the depth of knowledge and experience your company needs to ensure you maximize any deductions for the next tax year. Contact our team today to get started outlining your strategy.