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Orphan Drug Development R&D Tax Credits

The federal R&D credit and the Orphan Drug Development research and development tax credit are two of the most profitable tax incentives available to life sciences businesses. Both credits give you immediate or potential tax advantages aimed at lowering the price of your research activities. However, there are certain differences between the two.

Any pharmaceutical company investing in innovation that meets the IRS criteria can qualify for the R&D tax credit. On the other hand, the Orphan Drug Act was created in 1983 under IRC § 45C to encourage pharmaceutical firms to develop cures for specific rare diseases that affect small populations (less than 200,000 people in the US). Such operations openly require R&D, which means that once the FDA has granted you orphan drug status, you can apply for the Orphan Drug Development R&D tax credit (ODTC).

Qualifying Costs and Activities

R&D tax credit in the Orphan Drug Development industry enables you to recover 100% of the qualified clinical trials expenses (e.g., employee salaries, materials, supplies, and subcontractors) incurred during clinical trials between the time of designation and FDA approval. In addition, you can stake a claim for a federal tax incentive that equals about 25% of your claim period QCTEs. However, the R&D tax credit in the Orphan Drug Development industry covers only costs related to clinical testing. Expenditures related to the discovery and preclinical stages of R&D should be claimed under the federal R&D tax credit.

That said, you can utilize either credit to offset employee wages and costs for hiring subcontractors for certain positions. Those job titles include clinical trial coordinators, clinical pharmacologists, research coordinators and nurses, C-suite, principal investigators, data managers, physicians, and pharmacists.

To claim the Orphan Drug Development R&D tax credit, your pharmaceutical company should invest in:

  • Finalizing medication formula for efficacy and potency;

  • Overcoming poor solubility, bioavailability, or dissolving rate concerns;

  • Using subcontractors to find, evaluate, and sign up trial participants;

  • Requesting FDA’s and other regulatory agency’s clearance;

  • Assessing data from clinical trials (pharmacodynamics, pharmacokinetics, etc.).

Understanding what is required to support a credit claim is vital because the qualification standards for the R&D credit and ODC are nuanced. Therefore, consult with our specialists to learn more about how the ODC or R&D credit may increase your budget and lower the cost of your business development activities.



What kind of companies can apply?

Pharmaceutical companies that work on orphan drug development and conduct qualifying research activities.

What data do I need to calculate credit?

Claim period gross receipts.

What information do I need to provide?

General ledger expense detail, payroll records, project notes, project lists, emails, purchase orders, and other documents regarding QREs for the claiming period.

Is credit carryforward an option?

Yes, up to twenty years.

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