Life Sciences and Healthcare

One way Texas is able to foster a competitive advantage and continue to create much needed jobs is by investing in life sciences and healthcare. The impact the biopharmaceutical sector has on the economy is continuing to grow and investment, along with the support of the R&D credit, is essential to support that growth.

Research and development is important for the future of healthcare, but it’s also vital if America wants to remain competitive in this industry. Investing in medical innovation and research offers long term benefits to the people in the US and around the world, and to the success of the American economy. The biopharmaceutical sector is one of the few areas of economic growth, highlighting the need to further invest and innovate. In addition to the research and development investment it’s also important to continue educating the young in math and sciences as this is of paramount importance to future innovations and the economy.

The Government is Behind Research and Development

One of the ways the government works to show their support for R&D in the life sciences and healthcare is through the R&D tax credit. The credit has been made friendlier to this area of research and development, yet many businesses fail to put in their clam for the tax incentive. Worries about the calculations, misunderstandings regarding the qualifying expenses and concerns over investigations from the IRS are holding the sector back. To try and encourage more businesses to take full advantage of this credit the government has tried to make it easier to understand. Business owners and entrepreneurs focusing on developing new research, processes and products will continue to boost the economy and make America competitive globally.

Are You Eligible?

Many firms are failing to recognize the expenses they’re able to offset against the tax credit. As a result there has been a decline in the applications for the tax credit in recent years. Swanson Reed is able to assist you when reviewing your eligibility. Here is a list of some of the initiatives that may be eligible:

  • Developing the processes for new products such as clinical testing phase of clinical trials, FDA qualifications and validation
  • Manufacturing process scale up design and developments
  • Manufacturing experimental qualifications in clinical trials
  • New production lines and factories used for new technology
  • Product improvements to improve the shelf life of products, reduce the side effects, the stability of the product and the dosage
  • Supporting new product developments through biometric analyses

Establishing the costs behind R&D can prove to be difficult, mainly because many companies fail to set up a project accounting system that is able to capture all of the expenses provided by the various personnel that are involved in the R&D process.

We have the professionals available to assist you with your R&D claim. Our accountants and specialist team are able to come into your organization and ensure you have the accounts set up to enable you to make the appropriate claims, ensuring you get back the money you need to continue your own research and development.

Could Changes in R&D Tax Credits Reduce Your Tax Bill?

Businesses all over the United States, from Ohio to California, are winning when it comes to recent changes for R&D tax credits. The tax credits are considered to be one of the most generous offerings for businesses in America, and thanks to the Obama administration’s proposal, things are about to get even sweeter. This could mean that there’s some excellent news in store for small- to medium-sized businesses looking to spend on technological developments and research in the near future.

Good News for Multiple US Businesses

The new rules are in the hands of the US Treasury Department. These rules are expected to remove many of the restrictions that are currently in place in the US tax code. Many small businesses could take advantage of the millions of dollars in savings that the new rules open. Some of the expected advantages include:

  • The ability to backdate tax claims by years
  • Companies being able to sell prototypes as end products to their customers
  • Opening the R&D tax credit to a vast range of companies that are not currently eligible under the current laws

According to the administration officials, the changes are only designed to clarify the current rules, helping to remove some of the confusion that can be experienced when making claims. They state that the changes will not increase the number of eligible businesses that could apply for the 30-year-old credit. However, many tax lawyers see the new rules differently. They see them as a positive move that could be a great giveaway to businesses due to the fact that the IRS is under so much pressure to become more accommodating.

Could R&D Tax Credit Be Here to Stay?

President Obama is keen on the R&D tax credit, and he has vowed to expand the current system and make it a permanent law, rather than one at risk of being removed from the US tax code. In fact, the R&D tax credit was one of the many tax breaks that expired on December 31, 2013, but it will once again continue to be revived as it has been so many times in the past since it was set up in 1981.

Could You Make a Claim?

If you are a business investing in research and development, you may be eligible for the R&D tax credit. If you’re spending on innovation, researching technological products and processes with the aim of creating something new, or improving on current products and processes, you may be able to reduce your tax bill quite substantially. Contact our team of specialist R&D tax advisors to discover if you’re eligible and learn how we can assist you throughout the process.

The Government’s Role in Facilitating Research & Development in the US

In the US the government, through the decades, has always played an active role in facilitating Research & Development, both in the private and the public sectors. This is only natural, considering the government’s priority in furthering economic growth. And economic growth and R&D go hand in hand, as innovation and changes in technology are integral to any country’s growth process.

As such, the government has come up with certain policies that directly encourage R&D activities. Government support for R&D is such that it has created agencies which provide grants, such as the National Science Foundation, and it has also developed various tax incentives such as the Research & Development tax credit which various firms can avail of.

The support of the government has proven effective for furthering R&D. In the early part of the 20th century, for instance, government support enabled the emergence of new technologies related to agriculture, health care, information technology, and chemicals. One particular case in point is the development of the lithium-ion battery, which was brought about with the help of materials research which was sponsored by the federal government.

In recent years, it can be said that the total R&D spending by the government has remained stable, making up approximately 2.5% of the GDP, or the gross domestic product. However, there are two main pointers related to this which may need further measures from the government. One is that the government’s R&D spending has gone down compared to private sector spending, and another is that the share of the government’s R&D spending on basic research has also declined. These issues need to be addressed, because the basic or fundamental research is the basis for most innovations. Therefore, certain economists have recommended that government support for basic R&D be increased in order to improve economic growth.

The government is therefore encouraged to create more positive policy instruments, especially when it comes to tax incentives. The government was already made aware of this more than two years ago, when in a speech by Ben Bernanke, he stated, “The challenge to policymakers is to encourage experimentation and a greater diversity of approaches while simultaneously ensuring that an effective peer-review process is in place to guide funding toward high quality science.”

The setting of clear-cut policies for R&D tax incentives, however, may be well under way. Recently, the IRS issued a series of proposals that seek to be more beneficial to firms engaged in the development of new products. These proposals eliminate any gray areas associated with R&D incentives, therefore encouraging firms to move forward with their research and experimentation activities with more stable and solid backing from the government.

If your firm is engaged in R&D and would like to know more about how you can qualify for government tax incentives, we at Swanson Reed can help you. Our company has been involved in R&D for more than 30 years, and we have assisted various firms with all their R&D tax incentive needs and requirements.

What Happens When the R & D Tax Credit Expires?

Many companies spend years developing their research and development programs and each year they apply for the R&D tax credit. The credit isn’t a law that simply exists. Like many other tax programs, it expires and Congress has to renew it for another term.

Last year, the credit expired and it has yet to be renewed. While there is every reason to think the government will renew it again, it isn’t guaranteed. In that event, it can impact companies in many ways, leading to loss in profits and both consumer and investor confidence.

The First Quarter

When companies that qualified for the tax credit last year reported profits, they would have included all the money saved from the credit in those first quarter earnings. That’s four quarters of tax credit savings reported in the first. Without the certainty of the credit, this year they’ll have zero. That can have a significant impact on their profitability projections for shareholders. The company can attribute the losses to the non-renewal of the tax credit, but that may not be enough for shareholders reading their reports.

Results and Research

The budget that the company provides the research and development division with often includes an offset from the tax credit. Without that guarantee of that credit, budgets can be slashed. This not only slows down research and results but can also lead to layoffs and putting off the purchase of much needed equipment. The impact trickles down to contractors and anyone else associated with research and development and the business itself.

Stocks

For publicly traded companies, the loss of the tax credit and the revisions of profit projections can cause a fluctuation in the stock market. Nervous investors may begin selling stocks and driving the price down in an effort to decrease their overall risk. Falling stock prices are never a good omen for investors and shareholders. In the short term, it can have a negative impact on stocks, but given likelihood of extensions, it will not have a long term negative impact.

Permanence

According to theWall Street Journal, both Presidents George Bush and Barack Obama had considered making the tax credit a permanent fixture in the tax laws. This would eliminate the need for renewal. The problem with making it permanent would be the cost. The Journal reports that the cost of the last two-year extension over 10 years was about $14.3 billion, but making it permanent would cost about $100 billion over 10 years.

Companies that deal with research and development are counting on this research to create a better product and help them achieve a better bottom line. When the tax credit is not renewed, then it can play havoc with their overall R&D plan. Companies stay successful through planning and strategy, and while there may be a backup plan for when the credit expires, there is simply no way to get that money back without significant changes to the R&D program.

An Overview of the Recently Proposed Regulations for R&D Tax Credits

Research & Development plays a big role in a good number of industries today, most notably in the US. Recently, the government has come up with new regulations regarding the filing of R&D tax credit, which seeks to eliminate those ‘gray areas’ that have long confused business taxpayers in the past.

For one, a proposed ruling seeks to revamp the claiming of credit for expenditures which a company incurs which are related to the development of pilot models or any tangible property. It is to be noted that in the past, there was a lack of understanding regarding qualification for R&D tax incentives if the product developed by a company was subsequently sold in the market. It seems that products which were subsequently sold or distributed would not qualify for tax credit. But the new proposal brought forth by the IRS seeks to eliminate this gray area. This means that any expenditure incurred for the research and development of a product will still be able to qualify for tax credit, regardless if it is eventually sold in the market or used by the company as part of its business.

Another proposal involves the definition of a pilot model. A pilot model is referred to as any model or representation of a certain product which has been produced to resolve any uncertainty related to the product while it is being improved or developed. The pilot model would therefore include a representation that is fully-functional, or a component of the product. This brings us to another proposal involving the shrinking back provision. This provision is used when the Sec. 174 requirements have been met, but only for the component of a bigger product. This means that a company can redesign or refine the components of a product after it has already been produced. So even though the product already has a basic specification for its design, the expenditures of a company to eliminate any uncertainty with regards to the design of some of its components may qualify as credit.

These new proposed rules and regulations may be beneficial to plenty of firms in the country, particularly those which are dealing with food processing or manufacturing. But these regulations may only apply to tax years which end on or after the final regulations have been published or approved. But the IRS has also stated that business taxpayers can already depend on the above-mentioned proposals until such time that the final regulation has been released.

Here at Swanson Reed, we are proud to have more than 30 years experience in R&D tax incentives. If you would like to learn more about how your firm can benefit from R&D tax credit with regards to your research and experimentation activities, contact us.

The Smart Move: Make Temporary Tax Credits Permanent

There is one important tax credit which can be of great benefit to corporations, manufacturers and research laboratories. It is generally known as the US Research and Development Tax Credit and it has been on the books since 1981, with a major revision occurring in 2003. While it is intended to stimulate research and development across a broad range of verticals, it has never been made a permanent law. In 2013, President Obama extended it until the end of 2013, making it retroactive for 2012. Now, there is a growing chorus of executives and congressmen who feel that it should be a permanent part of government policy.

The Two New Proposals Introduced in Congress

Two representatives from California; Rep. Scott Peters (Democrat) and Rep. Julie Brownley (Democrat), introduced in December two proposals that would not only raise the value of the tax credit itself, but also make it permanent. This is certainly a move that would be welcomed by businesses everywhere, as it would take away the uncertainty on a year-to-year basis as to whether some of their activities would qualify for this credit, while also increasing the value of the credit itself. Scott Peters’ proposal would raise the percentage of the credit from the current 14% to 20%, while Brownley’s proposal would actually boost it to 50%. Most would agree that, regardless of the percentage, having a permanent credit for research and development would not only boost innovation, but also allow US companies to more effectively compete in the global marketplace. Its permanence would ensure that they can engage in these activities without fear of getting audited.

The Texas Version of the Research and Development Tax Credit

During the months of May and June, both the state legislature and Governor enacted a new research and development tax credit, known as H.N. 800. This new law would provide companies involved in research and development with two choices for applying for the credit:

  • The Sales Tax Exemption. The company would be exempt from the Texas sales and use tax if a depreciable tangible property was used in qualified research. Additionally, the property would have to be stored, sold or used by someone who is actively engaged in qualified research. In this circumstance, the depreciable tangible personal property would have to have a useful life that is greater than one year.
  • The Franchise Tax Credit. As might be expected, in any taxable year, the company can either choose the Sales Tax Exemption or the Franchise Tax Credit, but not both. The formula for the Franchise Tax Credit is somewhat complex. The credit would be equal to 5% of the difference between the company’s research costs for the taxable year and 50% of the average amount of research that qualifies for this credit over the previous three years. The credit itself cannot be greater than 50% of the franchise tax that would be due during the same taxable year. Additionally, this credit may not be greater than 50% of any other franchise tax due, before taking into consideration any other tax credits. The good news is that if this credit is greater than 50%, any unused amount can be carried forward for up to 20 years.