When I hear or see the term “start-up,” for some reason my mind’s eye conjures images of fragile, slender vegetable plants that have just recently tunneled their way up through the dirt and into the light. They’re teetering just inches above the soil, still closer to their origin than their destination. At this stage, they require attentive care to afford them every advantage to grow and prosper.
One of the key expenditures incurred during software development activities is employee wages.
What you may not already know is that, under Internal Revenue Code (IRC) Section 41, some wages are considered qualified research expenses, especially if the employee’s activities are for direct research, direct supervision or direct support of those performing research.
This private company has grown rapidly over the past several years with annual revenues of approximately $125 million.
The company has four main research facilities (three in the U.S. and one in India). The primary goals of the company were to expand and strengthen its research and development expertise in the injectable and inhalation markets. An emphasis was placed on developing products for large patient populations with high technical barriers to enter the marketplace.
Much of its pharmaceutical R&D focus is on developing technical expertise to:
- Create products requiring an active pharmaceutical ingredient that is challenging and difficult to manufacture
- Design a new and complex drug manufacturing process
- Improve new drug formulations to provide better drug performance
- Establish new proprietary drug delivery systems and technology
The Company’s Potential To Capture R&D Tax CreditsSince most of this company’s R&D activities are conducted in the U.S. and California, it’s eligible for both the federal and California R&D tax credits.
The company employs over 150 scientists and other technical personnel dedicated to research and development activities, with expertise in the following areas:
- Pharmaceutical formulation
- Process development
- Toxicity studies
- Analytical and physical chemistry
- Drug delivery systems
- Device development
- Clinical research studies
To encourage pharmaceutical companies to invest in drug discovery and development that will only be useful for a small population of patients, the U.S. government enacted the Orphan Drug Act to help companies combat unique medical conditions. Since most pharmaceutical companies attempt to develop larger and more widely available drugs, this tax credit incentivizes the investigation of drugs with fewer commercial applications.
Drug discovery and development in the pharmaceutical industry is a complicated and complex process involving significant time, energy and resources with individuals developing new or improved medical products and drugs involving new research, the discovery of new development processes, preclinical and clinical testing, and high-tech drug manufacturing processes. Using R&D tax credits is one way companies can continue investing in innovative medicine.
One of the most lucrative incentives for companies that invest in research and experimentation activities is the federal and state R&D tax credit. Although the credit has been available since 1981, many companies in the pharmaceutical industry have failed to fully account for, identify and claim credits for research expenditures.
A key component of the R&D tax credit is determining which activities and expenses are eligible.
Congress has permanently extended the research and development (R&D) tax credit, retroactively as of January 1, 2015. This extension is part of the PATH Act of 2015.
Adding to the research credit’s much-anticipated permanence, the legislation also features important changes expanding how the R&D tax credit benefits are currently used, especially by small businesses.
The following are key enhancements as a result of the new R&D legislation changes:
**This case study is an amalgamation of CTI client success stories – based on real-life outcomes – to showcase a balanced, conservative perspective in the interest of not inflating numbers or empty promises.**
Company XYZ, Inc. is a food manufacturing company with four facilities spread throughout California, including its headquarters facility, which is located in Sacramento.
Historically, the company had not been in a taxable position. As a result, they typically categorized all new construction, renovation and acquisition fixed asset costs using the straight-line depreciation (39-year) method.
This year, however, the company faces a significant tax liability and is pursuing opportunities for accelerated depreciation deductions.
The main trigger to consider conducting a fixed asset disposal study is when you plan to renovate real estate property. When planning to demolish or renovate a building – whether tearing out lighting, HVAC units or other components – these assets are effectively abandoned or retired from the building. The tangible personal property’s remaining depreciable basis can be written off (for tax) once the asset is retired.
The concept is simple enough, but the challenge can be ascertaining the correct value for the component parts of the building. By performing a cost segregation on the original acquisition of the building, you obtain the value of the original components at the snapshot in time of the acquisition, thereby allowing you to the write off the remainder of the basis upon disposition of that old property.