As your pharmaceutical company increases its research and development (R&D) activities to design and develop new or improved drugs, it’s critical to have a formal process in place to track your R&D expenses.
One of the most lucrative incentives for companies that invest in R&D activities is the federal and state R&D tax credit. However, without the proper internal controls and procedures in place, documenting and maximizing these credits is challenging.
Where To Begin Your R&D Tax Credit Journey
Before you start evaluating your R&D activities, you must first fully understand the unique facts and circumstances of your research. At the outset of any research project, it’s important to map out your current accounting procedures that track potentially qualified research expenses.
Some pharmaceutical companies use formal project accounting, while others track expenses by cost center or departments. Based on these findings, a customized approach to capture qualified research expenses can yield good results and make the process of handling the workflow much more manageable.
With the right process in place, you reduce internal staff hours as well as the R&D service provider costs needed to document and calculate these tax credits.
Are You Waiting Until The Fiscal Year Ends?
It’s not uncommon for a company to rush an R&D tax credit evaluation, where internal accounting personnel are under significant time constraints and manpower to properly analyze costs.
Frequently, pharmaceutical companies wait until their fiscal year ends to even consider evaluating and documenting their qualified research expenses. This approach yields inconsistent and inadequate results that do not meet the IRS’s recordkeeping requirements to sustain the R&D tax credits.
Do not wait until the end of the year to review R&D activities and expenses. You want to set up procedures at the beginning of the year to regularly track, monitor and organize your types of R&D activities and costs that meet the tax credit’s eligibility requirements.