Orphan drug credit
Clinical testing for designated rare diseases earns a 25% credit, separate from the research credit.
Industry tax guide
Pharmaceutical and life sciences tax and accounting
Tax credits for clinical work, and finances ready for the next raise.
Pharmaceutical, biotech and life sciences companies spend years on research and clinical trials before revenue, fund that work through equity rounds, and build or lease specialized labs and production space.
Their tax picture is dominated by research incentives: the research credit, the orphan drug credit and immediate deduction of research costs, along with the losses and ownership changes that come with venture funding.
Compared with a general business
What makes taxes different for pharmaceutical and life sciences
Research-heavy cost structure
Most spending is research, so Section 174A and the research credit shape the return.
Ownership changes from funding rounds
Equity rounds can trigger Section 382 limits on net operating losses and credits.
IP location and transfer pricing
Where patents are held and how affiliates are paid for them drives global tax.
The rules in detail
Tax rules for pharmaceutical and life sciences
Orphan drug credit
Companies testing drugs for rare diseases or conditions designated under the Orphan Drug Act can claim a credit of 25% of qualified clinical testing expenses on Form 8820. Those expenses cannot also be counted for the regular research credit.
Research credit and payroll tax offset
Discovery, formulation and process development qualify for the research credit. A qualified small business can apply up to $500,000 a year of the credit against payroll taxes, which helps companies with no income tax yet.
Section 174A and losses
Domestic research costs are deductible right away again for tax years starting in 2025, which increases net operating losses. After a large funding round, Section 382 may limit how much of those losses can be used later.
Planning moves
Ways to save tax in pharmaceutical and life sciences
Claim the research credit and payroll offset
Up to $500,000 a year against payroll taxes for qualified small businesses.
Claim the orphan drug credit
25% of qualified clinical testing expenses for designated drugs.
Deduct research costs immediately
Section 174A applies to domestic research from 2025, with amended returns possible for small businesses.
Protect losses with Section 382 studies
Rounds are structured knowing the limit.
Plan for QSBS
Founders and early investors may exclude gain on qualified stock.
Use 100% depreciation for production space
Manufacturing facilities can qualify under Section 168(n).
Working with OICPA
How we help
Research and orphan drug credits
Clinical and preclinical spending reviewed for both credits, with the overlap handled correctly.
R&D Tax CreditPlan for the next round and an IPO
Ownership change studies, audit-ready financials and the tax provision investors expect.
Pre-IPO & Capital MarketsLab and production buildings
Cost segregation and 100% depreciation for qualified production property on manufacturing space.
Cost Segregation CoordinationEstimate the research credit
A quick estimate from wages, supplies and contract research costs.
R&D Tax Credit EstimatorBookkeeping and reporting
The accounting behind the tax work
Forecast runway by development stage and organize research documentation for a qualified specialist's tax incentive assessment.
The operating challenge
Long development timelines, research vendors, milestone payments, and financing rounds make the timing and classification of spending especially consequential.
The records that matter
Research project ledgers, vendor contracts, grant agreements, milestone schedules, and capitalization records give the review a practical starting point. We identify missing information before recommending changes.
What you can expect
- A prioritized review of the industry-specific accounting issues above
- A tailored reporting and document checklist based on your operating records
- An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination
Frequently asked questions
Can we claim both the orphan drug and research credits?
Yes, but not on the same expenses. Clinical testing costs used for the orphan drug credit are excluded from the research credit.
We have no revenue. Is the R&D credit useful?
Yes. Eligible startups can apply up to $500,000 a year against the employer share of payroll taxes, and unused credits carry forward.
Will our losses survive the next funding round?
They can be limited if ownership changes by more than 50 percentage points over three years. We run a Section 382 study before each round so the limit is known.
Related articles
References
- 26 U.S. Code § 45C: Clinical testing expenses for drugs for rare diseases or conditionsLegal Information Institute, Cornell Law School
- About Form 8820, Orphan Drug CreditInternal Revenue Service
- 26 U.S. Code § 41: Credit for increasing research activitiesLegal Information Institute, Cornell Law School
- 26 U.S. Code § 382: Limitation on net operating loss carryforwards and certain built-in losses following ownership changeLegal Information Institute, Cornell Law School
Rules reflect federal tax law as of November 2026.