Researching a rare disease? Get tax credit for that with the federal Orphan Drug Credit.
The orphan drug credit (ODC) is a federal tax credit available to companies working to find cures to rare diseases. It is not widely known but when claimed, provides taxpayers an opportunity to reduce the cost of R&D. The research must meet R&D criteria that address technical uncertainty through a process of experimentation.
The ODC allows a 50 percent credit of the qualified clinical testing expenses (CTE) for a taxable year. Clinical testing expenses that qualify include clinical trial costs, in house wages, supplies, outside contract and payments made to research or university organizations.
The ODC only applies to pharmaceutical discoveries for a rare disease or condition. Specifically, “rare” means any disease or condition which affects less than 200,000 persons in the United States, or affects more than 200,000 persons in the U.S., but for which there is no reasonable expectation that the cost of developing and making available a drug for such a disease will be recovered through sales in the U.S. This a great applicability to pediatric drug therapies.
Orphan drug status is determined by Federal Food, Drug, and Cosmetic Act (FDA) based on facts and circumstances. Taxpayers can begin tallying expenses the date the FDA designates ODC status.
R&D and ODC credits are calculated separately to avoid double dipping. As such, a taxpayer may not include ODC expenditures with another claim for research tax credits. Since the research tax is only 20 percent, the potential savings from ODC is greater at 50 percent, when available. Taxpayers can claim both R&D and ODC in the same year, provided there is no overlap in type of qualifying expenses.
Another distinction between ODC and R&D credits is the amount of qualified contractor spend allowed. The ODC allows for 100 percent of qualified contractor spend to be included as CTE, while the R&D credit taps the amount of the costs of eligible QRE at 65 percent.
Both the ODC and R&D credit can be taken in the same year but claiming the ODC credit is simpler. Taxpayers claim the ODC credit in their federal tax filings. Documentation used in support of a taxpayer’s FDA submissions can be used as audit support for their credit claim.
Get in touch with us if you think you have R&D activities that might qualify for orphan drug or R&D credits.
To find out how to take full advantage of research tax credits that could cut your federal and state tax liability, download “Pay less tax, invest more with R&D credits“. Or, request a complimentary analysis of potential credits.
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Jamie Overberg can be reached at joverberg@taxops.com or 720.227.0421.
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