R&D Tax Credit Opportunities for Pharmacy Compounding Services
If you are a compounder, you may qualify for a credit calculation worth potentially thousands of dollars in tax savings each year, based on the R&D tax credit. This could be worthwhile particularly for pharmacies producing 30 to 50 compounds on average per day.
Independent pharmacy tax planning advisor Scotty Sykes, CPA, CFP® recommends compounding pharmacies look into R&D tax credit qualification based on their prescription volume. There is a strict, four-part test to determine eligibility, but this is a tax credit that can reduce your tax liability year after year.
Talk to us at Sykes & Company, P.A. for more pharmacy tax trends and to help you plan ahead for your pharmacy.
If you prefer to read this content, the video transcript is below.
Scotty Sykes – The Research and Development Tax Credit was recently made a lot easier for pharmacies, or really businesses in general, to take advantage of as of the most recent tax years with the passage of some legislation. And so, as it made it a little easier for businesses to take advantage of, pharmacies can fall into that R&D tax credit opportunity, particularly compounding.
Compounding, it’s kind of a low hanging fruit there. So if you are a major compounder (30, 40, 50 plus compounds a day), you should be taking a look at this because there is a four-part test to determine whether you qualify, and you have to really run this test for every single compound you do.
So is there uncertainty at the outset? Did you go through a process of experimentation? Is it a new product or process? And is it technological in nature? So technological in nature and product or process, which would be the prescription, are pretty much easy to check off. It is really the uncertainty and the process of experimentation when you come across a compound that you are going to have to identify.
Obviously, compounders will run into compounds they pretty much know they can make, but they’re not exactly sure how they’re going to have to research it. They may have to make it a few times, alter the formula or whatnot. And that could be a qualifying compound in that instance. And if you are running a lot of those, and you are a big compounder, that can add up. And you have got some time involved in that, you’ve got a pharmacist involved, you’ve got techs involved. It can really add up for you.
Documentation is very key here. You’re going to have to be able to substantiate those, that four-part test and who is involved in that, the time and the hours involved so on and so forth. But again, if you are that heavy compounder, the credit calculation can be several thousand dollars and may be certainly worthwhile your effort, not to mention it is a recurring credit so it is a great opportunity, again, for those heavy compounders out there.
And the IRS has just recently come out with a new notice. I presume it’s a notice that says some more additional information will have to be attached to your tax return: identifying those qualifying activities, identifying who is in the process, time involved so on and so forth.
So they have kind of expanded the information required to attach to your tax return, but if you are doing the work already, and you’ve got that documentation handy, which you should, in running the calculations — there are several calculations — then you should be okay. So not every is pharmacy eligible here, but there are those out there that are heavy into compounding.
This should certainly be on your radar.