Natural Medicine R&D Tax Credit Benefits for Businesses

Natural Medicine and the R&D Tax Credit

Small businesses in the Natural Medicine sector, whether formulating cutting-edge herbal supplements, optimizing the bioavailability of plant extracts, or pioneering sustainable farming methods, can unlock hidden funding through the R&D Tax Credit. This incentive rewards innovation, covering costs from lab trials to ingredient stability testing. Even pre-revenue startups can benefit through the R&D Payroll Tax Offset, allowing them to redirect up to $500,000 annually in credits to offset payroll taxes, effectively turning research risks into relief for personnel costs. For holistic health innovators, this means more capital to refine proprietary blends, expand organic sourcing, or hire qualified herbalists, all while keeping cash flow intact.

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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 specialized 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 R&D credit audit insurance policy, creditARMOR, is one of the most cost-effective audit management products on the market.

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Case Study: Natural Medicine

Business Scenario

This case study demonstrates the application of basic legislative requirements for qualifying R&D activities, applied to relevant activities in the natural medicine sector.

Natural Glow produces high-quality organic cosmetics made with the purest ingredients sourced directly from distillers and growers around the world. The company continuously improves its existing ingredients by researching new filtration methods and extraction processes for aromatherapy and skincare. The company uses base ingredients and aromatherapy oils to ensure therapeutic value, safety of use, and appeal to users.

Given the nature of its work, Natural Glow constantly conducts R&D activities. For this specific project, Natural Glow believed that new products could be developed by reformulating existing ingredients, provided that sufficient research and testing were carried out to ensure the products were safe for human use and met all appropriate expectations.

To qualify for the Research and Experimentation Tax Credit, Natural Glow had to ensure its “qualified research” met four main criteria, known and developed by Congress as the Four-Part Test. After a self-assessment, Natural Glow declared the following experiments as R&D work.

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Natural Glow’s Eligible R&S Activities

Design and development of a series of prototypes to achieve technical objectives (design and development of the new product range).

The hypothesis for this experiment stated that the design, testing, and evaluation of various concepts would contribute to a more efficient and effective prototype testing phase.

Natural Glow conducted multiple experiments attempting to create high-end products. It then concluded that such a design was feasible but had to be prototyped and fully tested to prove the hypothesis.

Trials and data analysis to obtain reproducible results to a satisfactory standard and to test the hypothesis (development and testing of the new product range prototype).

Natural Glow’s hypothesis for this phase of experimentation was that the development and implementation of various designed components would allow refining and perfecting the final result to achieve project goals.

Natural Glow’s tests demonstrated that the theoretical conclusions of the design phase could be realized through the development of prototypes and related testing. The new knowledge generated would be used for further design and development iterations and for additional field testing.

Background research to assess current knowledge gaps and determine feasibility (background research for the new product range).

Natural Glow’s background research included:

Literature research and review.
Field trips to India and Greece to locate, source, and conduct preliminary testing of potential ingredients; to analyze competitors.
Analysis of consumer behavior and desires (e.g., anti-aging).
Consultation with industry professionals and potential clients to determine the level of interest and commercial feasibility of such a project.
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project.
Consultation with key suppliers of components/parts/assemblies to determine the factors they considered important in the design and to understand how the design needed to be structured accordingly.

The activities conducted in background research were necessary because they helped identify the key elements of the research project, thus qualifying as R&D.

Continuous analysis of customer or user feedback to improve prototype design (Feedback-based R&D for the new product range).

Natural Glow’s qualifying R&D activities included:

Continuous analysis and testing to improve the efficiency and safety of the design.
Continuous development and modification to interpret experimental results and draw conclusions that served as starting points for the development of new hypotheses.
Commercial analysis and functionality review.
Consumer trials and feedback.
Industry assessments.

These activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any defects.

Live Webinar: R&D Tax Credit in the Natural Medicine Industry

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identifying Qualifying Research Activities
Defining the 4-Part Test
How to substantiate activities through documentation
Identifying Qualifying Research Expenses

Cost: FREE

Knowledge Level: Basic*

R&S Tax Credit Training for Pharmaceutical and Life Science Industries

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Definition of Qualified Research

Qualified research consists of research activities with the intent to develop 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 the taxpayer’s 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 would eliminate 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 undertake 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 process of experimentation used to discover information must be fundamentally based on principles of the exact sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Natural Glow keep?

Similar to any tax credit or deduction, Natural Glow had to keep documents describing what it did in its R&D activities, including experimental activities and business records to prove that the work took place systematically.

Unfortunately, the only records Natural Glow kept were literature reviews and background research.

As a company claiming the R&D credit, you always want to be “compliance-ready” – meaning if you were audited, you could present documentation to show the progression of your R&D work. Here are some types of documentation that would be useful to keep: