Saturday, January 29, 2011

Biotech R&D Tax Credit - Healthcare Reform's 50% Tax Credit For Small Biotechnology Companies

A little noticed amendment in the 2010 Healthcare Reform legislation is a 50% tax credit for small biotech companies who perform qualifying research and development. The credit was promoted by Senators from Washington, Massachusetts, and New Jersey. Although all details are not yet available it is clear that:

* Qualifying companies must have 250 employees or less


* Only a limited number of activities will qualify.

Biotech R&D Tax Credit - Healthcare Reform's 50% Tax Credit For Small Biotechnology Companies

* Qualified projects must be approved by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services.

* It will apply to activities and expenses occurring in 2009 and 2010.

* It is available to pass through entities such as partnerships, S corps, as well as traditional C corps.

* For non-taxpaying entities a tax free grant of equal value can be made.

* Qualifying "therapeutic discovery projects" must have the potential to do one of three things:

* Result in new therapies "to treat areas of unmet medical need" or "to prevent, detect or treat chronic or acute diseases and conditions,"

* Or "to reduce long-term health care costs in the United States"

* Or "significantly advance the goal of curing cancer within a 30-years period."

* Other factors to be considered are projects with the greatest potential

* To "create and sustain high quality, high paying jobs in the United States, and"

* To "advance United States competitiveness in the fields of life, biological and medical sciences."

There is a limitation to the tax credit. Total funds available are billion over both 2009 and 2010. Details of the program could be available as early as June, 2010. Credit application filings should begin 30 days later. The challenge for smaller biotechnology companies will be first understanding the requirements, and then documenting their activities and expenses.

In many ways this is like the challenges for companies filing for §41 Research Tax Credits. This creates justifiable concern. For decades large corporations spending millions on R&D have also spent millions on tax advisors trying to figure out how to document their R&D expenses to qualify for federal and state research tax credits. This dilemma has caused companies to develop complex, time consuming and costly processes for interviewing R&D engineers and trying to reconstruct R&D activity, expenses, and critical supporting documentation well after the fiscal year end. The result has often been incomplete documentation, inaccurate reporting, and a significant loss of tax credits on IRS audit.

To avoid this dilemma, smaller companies must look to documentation methodologies that have proven to capture the maximum QRE (those of you already filing for §41 credits know this as qualified research expense), while also complete, accurate and contemporaneous documentation to demonstrate the qualifying activities. Considering the short time companies will have to prepare their documentation for this new Biotech Tax Credit, it could be difficult.

One possible solution is to assemble teams of tax accountants to survey your activities, receipts, and other documentation, and then prepare, item by item a report that will support your claim. Unfortunately, this is prohibitively expensive and even for the biggest firms, often unreliable.

Other solutions use high technology. In the past few years a few companies have developed systems that allow engineers to record data into spreadsheets or project management applications. The limitation of these systems is that it puts the burden of knowing what qualifies for tax credit on the engineer or other operations personnel.

Another solution is to have all reporting personnel document their R&D activity on a central database. This can be called a resource information exchange. There are service providers using this methodology and in at least one case packaging that online service with research tax credit expertise. The advantage to the subscribing company is that these high-tech services are significantly less costly, highly efficient, and very accurate.

In the words of Rick Humphrey, President of RIX® Technology, LLC, "Resource information exchange services typically offer what every small company is looking for to obtain this new Biotech Tax Credit. They are comparatively inexpensive, easy to learn and use, and will allow them to start documenting current R&D activity immediately. Most services allow for backfill of prior activities in the set-up process and would capture all 2009 activity and expenses. But the real benefit of online technology and databases is that it is a permanent resource, a knowledge base for future reference and use."

Small companies who are on tight budgets simply can't afford the huge fees of public accounting or large specialty tax firms, especially if they lose a significant amount of their credit on IRS review. So picking the right system and methodology for documenting their R&D activity is very important. It is especially important for pass-through entities that can directly benefit investors and for start-up firms that are not yet in a taxpaying situation. This methodology is already proven to provide the maximum allowable tax credits as efficiently as possible while providing additional benefits, including the ability for rapid filing.

In the case of the Biotech Tax Credit it is particularly important to have a system of documentation that the IRS can access easily and methodically. With an online system, activity and expenses are collected contemporaneously (gathered at the time of activity and including all qualified expenditures that occur) and maintained in a database. This online database allows the IRS, with client controlled access, to examine the data online without having to visit and disrupt your operation. If that isn't possible, make sure you have your supporting documentation readily available and in one location. With the Biotech Tax Credit rapid response is particularly important because competitors will be soaking up their portion of the billion quickly while others wait for Treasury approval.

For small to medium sized biotechnology companies this is a huge opportunity. As a quote from Sen. Menendez website1 states, this "Creates a credit that would encourage investments in new therapies to prevent, diagnose, and treat acute and chronic disease, lower health care costs."

With the new Biotech R&D Tax Credit many companies will be able to turn their early development costs into cash long before they reap the benefit of their products going to market. But, don't wait too long to get in line. The bank for this benefit will empty quickly.

Written by:

Nick Vasilieff

Freelance Writer/Consultant

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Nickolai Vasilieff is an entrepreneur and freelance writer with a background in international business, sales and marketing. He is now practicing as a free-lance technical writer helping companies produce high quality professional profiles, articles, user-stories, and other marketing materials.

During his 20-year tenure as President and CEO of TPI, Vasilieff worked with over 150 companies from over 35 countries to expand markets, managing sales, marketing and operations, and introducing over 250 products and services.

Currently Vasilieff works as EVP with Rix Technology, LLC, on the introduction of a new and exciting online based technology for documenting R&D activity specifically for research tax credit. The potential market for this application includes all US based companies doing over 0m in annual sales. RIX also has industry specific modules, such as the RIX Biotech Module released in April 2010. Vasilieff is responsible for all marketing, sales, and client ralations for the company.

Nick Vasilieff

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