Article
Key tax credits and incentives for your life sciences company
Sept. 28, 2021 · Updated March 27, 2025 · Authored by Rich Croghan
Through advancements in technology, collaboration, and continual research, development, and discovery efforts, the life sciences industry is pushing the boundaries of innovation at a rapid rate. This innovation drives R&D and stimulates economic growth.
Life science companies have opportunities to claim R&D tax credits and Orphan Drug Tax Credits (ODC) to reduce certain tax liabilities. However, these benefits come with varying rules, applications, and qualification criteria that a company must meet to be eligible.
Furthermore, there are potential risks associated with claiming these tax credits that require proper documentation and substantiation to support the qualified research expenses claimed as part of these tax credits.
This article will:
- Introduce components of the R&D tax credit and ODC
- Provide updates to recent guidance that impacts the determination of qualified research expenses that are a key element of the tax credits
- Provide insight into the IRS' audit guidelines for life science companies
Available credits
The R&D tax credit is available to life sciences companies that develop new pharmaceuticals, biologics, devices, diagnostics, delivery systems, and any other new products, processes, techniques, formulas, or inventions that result in new or improved functionality, performance, reliability, or quality.
Additionally, life science companies are increasingly using more sophisticated technologies, such as artificial intelligence and machine learning, in their research. These costs may qualify for the research credit as well.
The credit is available at the federal and state level, with over 30 states offering a credit to offset state tax liability.
R&D payroll tax credit
Qualified small businesses may be eligible to apply up to $500,000 for taxable years beginning after Dec. 31, 2022, of the R&D tax credit against their federal payroll taxes for up to five years.
The following qualification criteria apply:
- The company must generate less than $5 million in worldwide gross receipts during the current tax year
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.