Douglas Kalman, PhD, MS, RD, CCRC, FACN10.01.12
There are many steps in designing a dietary supplement. Some companies formulate based on what is selling at the moment, while others search published literature to build a product with key ingredients that have scientific support. Yet others will formulate products based on the basic wants and needs of the owner or formulator, without any regard for recent trends or the latest science.
The use of third party private label manufacturers makes any of these approaches quite easy to undertake. However, products formulated based on published studies that use the same exact ingredient, at the same dose tested appear to be better positioned for regulatory approval and consumer acceptance. Ideally, as part of the R&D process, a product is tested under third-party good clinical practices for efficacy before going to market. R&D departments that utilize the state and federal tax credits for product development make the best use of money, time and resources, while building unique intellectual property (IP) for the company that sponsors the work.
2012-2013 Research & Development Tax Credit
If your company is less than five years old, the U.S. government considers you a startup. Very recently, Senators Chris Coons and Mike Enzi, along with Marco Rubio and Charles Schumer, introduced the “Startup Innovation Credit Act of 2012.” If your company meets the criteria, it would be wise to have your accountants look into how the Startup Innovation Act could benefit your bottom line. As a side note, both Democrats and Republicans supported this bill, as well as the extended “regular” Research & Development Tax Credit. Both are positioned to benefit companies involved in R&D activities.
Does the R&D Tax Credit Foster Growth?
According to the Journal of Accountancy, utilizing the IRS state and federal tax codes for R&D reduces overall corporate business costs 6-7%. To recap, the R&D tax credit is for taxpayers of any size that design, develop or improve products, processes, techniques, formulas or software. The credit itself is calculated on research activities and expenditures, and is designed to reward the innovator. Knowing how to calculate how much credit your company should be receiving is an art that specialized accounting firms excel at. Thus, understanding the regular research credit (RRC) as compared to the alternative simplified credit (ASC) is something that an accountant or accounting firm must know.
Further, if your company also sponsors clinical research (on an ingredient or finished formula), you could also take advantage of the qualified research expense (QRE) for credit.
Further, if your company also sponsors clinical research (on an ingredient or finished formula), you could also take advantage of the qualified research expense (QRE) for credit.
The QRE definition falls under IRS (IRC) Tax Code 174 and includes the following as qualified research: (1) The research must be undertaken for the purpose of discovering information that is technological in nature; (2) Substantially all of the research activities must constitute a process of experimentation; and (3) The experimentation must relate to a permitted purpose.
These definitions cover such activities as: (1) Developing new or improved products, processes or formulas; (2) Developing prototypes or models; (3) Developing or applying for patents; (4) Certification testing; Developing new technology; (5) Environmental testing; (6) Developing or improving software technologies; (7) Building or improving manufacturing facilities; and (8) Streamlining internal processes.
Some companies elect to forgo this tax credit or miss it entirely because they don’t know about it. Yet, under IRS (IRC) Section 162 they deduct these expenses as ordinary and necessary business expenses. What is often also missed is that there is nothing in the law that forbids you from using IRS (IRC) Tax Code 174 and Section 162, so that you can truly deduce your qualified research and capital expenditures. So many dietary supplement companies don’t realize that all of the above includes product testing (internal and external), as well as clinical trials and continued refinement of the products or the delivery systems of the products.
Companies should also be aware that they can claim retroactive tax R&D credits (typically for three prior years) and that the R&D tax credit does have a limitation related to the general business credit. You are restricted to 25% over any tax liability greater than $25,000, though you can carry forward unused tax credits for 20 years.
Under IRS (IRC) tax codes 41 and 174, research and experimental expenditures that are eligible for credit also include in-house wages (salary, consultant fees, etc.) and supplies attributable to qualified research, contract research expenses (the fees for sponsoring research at a private center, university, hospital and a CRO). If you have in house R&D and also outsource some R&D and are not applying for the tax credits available to you on a state and federal level, you are probably negatively affecting your true bottom line.
Douglas Kalman, PhD, MS, RD, FACN, is director of clinical nutrition at Miami Research Associates (MRA), Miami, FL, in the Nutrition and Endocrinology Division. MRA is a clinical service organization involved for over 10 years in phase II through post market trials for the pharmaceutical and nutraceutical industries. Mr. Kalman is also an active member of the American College of Sports Medicine, American College of Nutrition, the American Dietetic Association, the National Strength and Conditioning Association and the Association of Clinical Research Professionals. He is also the executive vice president and treasurer of the International Society of Sports Nutrition (ISSN). He can be reached at 305-666-2368; Fax: 305-669-8966; E-mail: dkalman@miamiresearch.com; Website: www.miamiresearch.com.
Douglas Kalman, PhD, MS, RD, FACN, is director of clinical nutrition at Miami Research Associates (MRA), Miami, FL, in the Nutrition and Endocrinology Division. MRA is a clinical service organization involved for over 10 years in phase II through post market trials for the pharmaceutical and nutraceutical industries. Mr. Kalman is also an active member of the American College of Sports Medicine, American College of Nutrition, the American Dietetic Association, the National Strength and Conditioning Association and the Association of Clinical Research Professionals. He is also the executive vice president and treasurer of the International Society of Sports Nutrition (ISSN). He can be reached at 305-666-2368; Fax: 305-669-8966; E-mail: dkalman@miamiresearch.com; Website: www.miamiresearch.com.
