Biotechnology R&D Tax Credit Benefits for Businesses

Biotechnology and the R&D Tax Credit

Small businesses in the biotechnology sector can significantly benefit from the R&D Tax Credit, reducing their tax liability through qualified research expenses. For startups with little to no income tax liability, the R&D Tax Credit payroll tax offset offers a valuable alternative, allowing them to use up to $500,000 of the credit annually to offset payroll taxes. This helps alleviate financial pressure in the early stages, directly offsetting a portion of personnel costs and freeing up liquidity to reinvest in research, development, and innovation. It is a crucial incentive that supports biotech startups in achieving groundbreaking discoveries while managing limited budgets.

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Founded in 1984 by J.W. Norris as Reed & Co., Swanson Reed has grown to become one of the world’s largest specialist R&D tax credit consulting firms. We boast numerous publications. Our AI software, TaxTrex, is a cutting-edge AI language model capable of preparing R&D tax credit claims in just 90 minutes. Our audit insurance policy for R&D credits, creditARMOR, is one of the most cost-effective audit management products on the market.

If you have any questions or require further assistance, please call or email our CEO, Damian Smyth, at (000) 000-0000. Feel free to book a quick conference call with one of our national R&D tax credit specialists at a time convenient for you.

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Biotechnology Case Study

Business Scenario

The American Animal Nutrition Organization (AANO) is dedicated to providing natural, non-antibiotic solutions to various animal health and nutrition problems.

In 2012, AANO decided to participate in an eight-year study to ensure that American beef was high quality, ecologically responsible, safe, and nutritious. AANO formulated a hypothesis for this research program, which stated:

“With knowledge of the intrinsic factors regulating gastrointestinal tract metabolism, we can identify mechanisms to improve feed intake, increase feed efficiency, and reduce reliance on antibiotic use.”

The first research phase of AANO’s R&D study involved identifying the intrinsic factors regulating feed intake in cows and developing a suitable low-temperature, high-humidity pellet that facilitated feed ingestion by the cows.

To achieve its technical objectives and overcome related technical risks, AANO generated new knowledge at the conclusion of each experimental phase and built upon that knowledge in each subsequent phase of the project.

After the first year of experimentation, AANO needed to determine the eligibility of its proposed R&D activities to know if they qualified for the Research and Experimentation Tax Credit. To be eligible, AANO needed to be certain that its “qualified research” met four main criteria, known and developed by Congress as the Four-Part Test.

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AANO’s Eligible R&D Activities

Design and development of a series of prototypes to achieve technical objectives and prove the hypothesis (design and adaptation of the chemosensory test model).

AANO’s main objective for this activity was to determine if it was possible to design and develop a model to identify cow preferences based on the chemosensory properties of an ingredient. This experimentation phase included:

Identification of substances known to impact feed intake and efficiency.
Validation of a model to identify cow preferences based on the chemosensory properties of an ingredient.
Determination of the model’s statistical sensitivity to identify preferences for different ingredients and purification of feed ingredients.
Determination of optimal feed processing conditions to maintain the intake enhancement of an ingredient in commercially relevant cow feed.

Trials and data analysis to obtain reproducible results to a satisfactory standard (development and testing of feed intake and efficiency enhancers).

The hypothesis for this AANO activity stated that with better knowledge of the intrinsic factors regulating gastrointestinal tract metabolism, it was possible to identify mechanisms to improve feed intake, increase feed efficiency, and reduce reliance on antibiotic use.

Details of this experiment included the development of enhancers based on information obtained through the model and the testing of enhancers to ensure efficiency, accuracy, and safety.

Background research to evaluate current knowledge gaps and determine feasibility (background research for feed intake and efficiency stimulants).

AANO’s background research included literature research and review, consultations with industry professionals and potential clients, and a preliminary review of equipment and resources.

Activities conducted during background research were eligible because they contributed to identifying key elements of the research project.

Ongoing analysis of customer or user feedback to improve prototype design (feedback-based R&D for feed intake and efficiency enhancers).

AANO’s eligible R&D activity for this phase of its project included:

Continuous analysis and testing to improve the efficiency and safety of the design.
Continuous development and modifications to interpret experimental results and draw conclusions serving as a starting point for the development of new hypotheses.
Commercial analysis and functionality review.

These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any design flaws, thus qualifying as R&D.

Live Webinar: R&D Tax Credit in the Biotechnology, Chemical Engineering and Nanotechnology Sector

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Learning Objectives Include:

An Overview of R&D Tax Credits
Identifying Qualified Research Activities
Defining the 4-Part Test
How to Substantiate Activities Through Documentation
Identifying Qualified Research Expenses

Cost: FREE

Knowledge Level: Basic*

R&D Tax Credit Training for the Biotechnology Sector

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Definition of Qualified Research

Qualified research consists of research activities aimed at developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or software that the taxpayer intends to hold for sale, lease, license, or actual use in their trade or business.

The Four-Part Test

Activities eligible for the R&D Credit are described in the “Four-Part Test,” which must be satisfied for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that eliminates uncertainty regarding the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, the method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must follow a systematic process designed to evaluate one or more alternatives to achieve a result, where the capability or method to achieve that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
Technological Nature: The experimentation process used to discover information must be fundamentally based on principles of hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.
What specific records and documentation did AANO keep?

As with any tax credit or deduction, AANO had to keep business records describing its R&D activities, including experimental activities and documents to prove that the work was conducted systematically.

AANO kept the following documentation:

Background research
Project logs and lab notebooks
Photographs / videos of the extrusion process
Test protocols
Test / trial results or analysis
Resource allocation logs / usage logs
Tax invoices

Having these documents on file, AANO confirmed it was “compliance ready,” meaning that if it were subject to an IRS audit, it could present documentation to show the progress of its R&D work.