Maximize R&D Tax Credits With Pharma Executive Wages

Written by Taz Singh, CPA. Updated Apr 7, 2016.

Maximize_RD_Tax_Credits_With_Qualifying_Pharmaceutical_Executive_Wages.jpgOne 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. Pharmaceutical R&D Tax Credit: Eligible Wages

A significant qualified expenditure for most pharmaceutical companies is wages paid to in-house scientists, chemists and other highly educated and paid personnel who perform research activities for their company.

Internal Revenue Code (IRC) § 41(b)(2)(D)(i) provides that the term “wages” has the same meaning, given such term by IRC § 3401(a), and constitute wages as subject to federal income tax withholding.

Many times pharmaceutical companies only identify the core R&D scientists and first-line personnel as having performed qualified activities. But, many different types of employees are involved in R&D activities, not just the core research and development teams. The R&D tax credit is an activity-based credit allowing companies to claim research and experimental expenses for anyone who is performing “direct research,” “direct supervision” or “direct support” activities.

Qualifying High-Level Executives: A Few R&D Tax Credit Opportunities

Direct Supervision
Pharmaceutical firms often overlook pharmaceutical research and development activities performed by high-level executives with direct supervision responsibilities over employees conducting research activities.

For example, chief medical officers at drug development companies may be overlooked since they might not be considered part of the core research department and related cost center. Instead, they count themselves as part of an executive administrative account, even though they are direct supervisors to many scientists and chemists performing research activities.

Since a company’s supervisors and high-level executives typically have higher wages and bonuses than the first-line chemists and scientists, failing to include direct supervision wages can cost companies significant R&D tax credits.

Direct Research And Support
Another potential area for opportunity is how a company tracks the time a high-level executive works on a project.

Even if pharmaceutical companies do a good job of using formal project accounting to document their time and expenses on new drug discovery development projects, high-level executives frequently are not required to track and record their qualified and nonqualified activities on a daily basis.

An important rule sometimes overlooked is that if 80% or more of any employee’s time is devoted to qualified research activities that year, 100% of their annual wages may qualify for the R&D tax credit

High-level executives’ time is frequently understated in this respect, with many not recording all of the time devoted to research activities. Instead, executives book more of their activities as administrative.

With a more accurate account of their time, companies can take advantage of the 80% rule to account for more of their high-level executive activities as eligible wages for the R&D tax credit.

High-level executive wages make up a substantial portion of R&D expenses, so pharmaceutical companies should be familiar with all of the procedures and rules available to maximize their company’s R&D tax credits.

Ready to learn more about capturing pharmaceutical R&D tax credits? Download your complimentary, educational guide below.
Capturing Pharma R&D Tax Credits To Fund New Drug Discovery & Development  Discover what R&D activities will qualify your pharmaceutical company for tax  incentives. Download Guide

Topics: R&D Tax Credit

Taz Singh, CPA

Written by Taz Singh, CPA

Taz has 20 years of experience in tax and business incentives. Prior to establishing CTI, Taz served as a corporate tax auditor for the California Franchise Tax Board. During his tenure, Taz specialized in auditing tax credits, including manufacturers’ investment credits, research & development credits and credit limitations (IRC 382 Limitation) due to ownership changes.