The healthcare industry is the epitome of research and development. Healthcare treatments require constant innovation to adapt to new diseases and illnesses, and the delivery of healthcare must continually improve to counteract rising healthcare costs. As a result, the world of healthcare is changing rapidly and in drastic ways due to technology and innovation.
For example, health consumers are becoming more informed due to the digitization, accessibility and real-time gathering of medical information through wearables, biosensing technology, and other artificial intelligence. New forms of delivery of medical care such as telemedicine are creating opportunities for patients to obtain adequate care efficiently and effectively.
All these advancements and more, are products of focused research and development activities being undertaken which most likely qualify for the federal tax research and development tax credit. Consequently, companies involved in any type of new products or new methods of medical care delivery should ensure they are maximizing the tax benefit of conducting such activities. Doing so may provide more cash to fund additional research and stay competitive in an ever-changing field.
Benefits of the R&D Tax Credit
There is a federal tax benefit between 4.5% and 6.5% per dollar of Qualified Research Expenditures (QREs).
Businesses with average gross receipts of $50 million or less for the prior three years can apply the credit to Alternative Minimum Tax liabilities.
Eligible startups can use the credit to offset payroll withholding taxes. Startups using the provision must have gross receipts of less than $5 million and no gross receipts prior to the five taxable years ending in the then-current tax year. The credit towards payroll withholding taxes is limited to $250,000 in one year, but companies can carry forward excess credits to apply to future payroll withholding taxes.
Expenses eligible for the federal credit include wages, supplies, contract research and basic research payments to qualified non-profit organizations and institutions. While there are several ways to calculate the credit, the Alternative Simplified Credit base amount is 14 percent of qualified expenses that exceed a calculated base amount.
Applicability of R&D to Medical Industry
In general, to be entitled to the research tax credit, a taxpayer must be engaged in “qualified research.” Qualified research, in technical terms, is research that is undertaken to discover information which is technological in nature and the application of which is intended to be useful in the development of a new or improved business component; and substantially all of the activities constitute elements of a process of experimentation for a functional purpose. In practical terms, the medical industry involves established companies and start-up companies embarking on many endeavors that are considered “qualifying research” such as: inventing and designing new products, improving on products, improving equipment to satisfy new regulatory requirements, conducting testing and creating prototypes.
For example, research and development (R&D) related to wireless monitoring devices that are integrated with the web allowing patients and medical professionals to interact through video may qualify. Additionally, research related to developing wearables that collect data, provide medical accuracy and allow patients to link their data to their standard medical records may also qualify.
Another big development that continues to grow with additional research and experimentation is the 3-D printing of medical devices. 3-D printing of medical devices is becoming more commonplace because the devices last longer than those created through traditional methods, and generally take less time to create. Another benefit of 3-D printing of medical devices is that the device can be customized to the patient. The process to get 3-D printing to its current stage, and the process it will continually take to innovate, modify, and improve 3-D printing creates research and development tax credit opportunities.
The examples of medical equipment innovation are numerous and include a broad range of activities because of the unique nature and requirements of the healthcare industry. In addition to those mentioned, qualifying R&D also includes developing engineering drawings and specifications, performing CAD modeling, tooling and equipment fixture design and development, implementing factory automation and other automated efficiency improvements including robotic automation, developing microprocessor software code for the operation of a medical device, designing electrical equipment and implementing processes or robotics.
Clinical tests conducted prior to commercialization, conducting tests to satisfy foreign regulatory requirements, and generating prototypes for testing and validation also qualify as R&D.
Due to the high-volume of innovation and disruption in the medical industry, R&D credit opportunities may arise when least expected. Meaning, R&D activities may arise from a sudden discovery that existing technology is insufficient, or existing expertise may not be in place, so a project is started without certainty in how to complete it. Consequently, activities that are not planned as R&D may turn into R&D.
Do you qualify for the R&D tax credit?
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.