R&D Tax Credits Enhance Life Science Impact Investing



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Life-Science-Investing
        Life sciences are a major social impact investment category where research and development (R&D) tax credits can enhance investment returns.  Impact investing is attractive to a broad range of investors including environmentalists, millennials, not-for-profits, foundations, family wealth managers, and everyone interested in an improved society.

        There are an estimated 800 impact funds focused on everything from education and infrastructure to healthcare and microfinance. Other popular impact investment categories include clean energy, and sustainable farming.  

        As investment funding increases for this asset class, investment managers have the opportunity to make sure that the companies selected for investing are utilizing federal and state R&D Tax Credits which will enhance their economic return.


The Federal R&D Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.

        The new startup R&D provision functions at a $250,000 per year venture capital cost contribution and are very beneficial for life science startups.


The Life Science Segment

        Many people want to address health and medical issues that impact society – including scientists and engineers with technical expertise, family members and friends facing health issues, the investing public and crowd source funding startup investors, and some of the wealthiest benefactors in the world.

        The life science segment encompasses many subsections for investment consideration.  Impact investors should give some thought to their overall impact investment goals.
 
        Some life science investments have a long term horizon and others have shorter completion cycles.  In addition, some life science investments involve the integration of other fast growing technologies such as big data  and the Internet of Things (IoT).

This article is designed to survey specific life science technologies including:

  1. Biology
  2. Pharmaceutical Drugs
  3. Wearables and Devices
  4. Imaging, Scanning, and Cameras


Biology

        Many scientists feel that in order to effectuate life science developments, meaningful improvements in our basic biology understanding need to take place. Some of the largest categories include the brain, heart, cancer, and Alzheimer’s. Our articles on the R&D tax credit aspects of some of the major biology areas include:  



Pharmaceutical Drugs

Wearables and Devices

        Due to the ever-improving mobile technology, major near-term benefits are achievable with wearable technology developments. Accordingly, this is a very popular life science impact investment category. The wearables category is divided into two major subcategories: FDA approval not required and devices requiring FDA approval.

        Generally, FDA approval is required for devices that diagnose and prescribe/provide medical treatment, however approval is not required for devices that measure and monitor. Our articles on wearables and devices, including the health cloud are below:



Imaging, Scanning, and Cameras

        As imaging, scanning, and camera technology continues to advance, our knowledge of biology improves and a variety of healthcare technologies involving mobile phones and devices are enhanced.  

        Our articles on the R&D tax credit aspects of imaging, scanning and camera's for medical technology include:  



The Holistic Medicine & Technology Approach

        Entrepreneurs looking for opportunities in this space can take a holistic approach and look at the total spectrum of overall patient care related to a procedure.

        Medical procedures typically have three component steps namely, pre-op, the operation itself, and post-op.  The following examples illustrate the difference between a purely medical approach and total patient care approach.

        With colonoscopies, most physicians consider the actual colonoscopy procedure fairly routine. However, studies demonstrate that the pre-op colonoscopy preparation process is quite difficult for many patients and the extent of some patients’ difficulties aren’t generally understood by many physicians.  Hence a new and important need might be to use technology to improve the colonoscopy pre-op process.

        With hip surgery, it is the post-op process that is most challenging for patients.  Many older surgery patients have successful hip operations but are challenged by the post-op process. If the process is unsuccessful, it can result in a major decline of the patient’s overall health status.  Here, a new important need may be to use technology to improve the post-op hip surgery process.


Understanding Needs

        The interest in life science investment is so strong that most new startups all go through a formalized “needs analysis” before committing to a new life science business.  

        This process which is textbook taught methodology should be reviewed by the life science impact investor on a 360 degree basis.  The impact investor should make sure that the startup has identified the same opportunity that the business team has identified and demonstrated the market need.  The business startup team should be sure they understand the investor's mission so as to minimize any friction.  


Conclusion

It is imperative for an impact investor to understand and identify what they are investing in before investing and implementing their concept. Life science impact investing can be beneficial for the development in areas of biology, drugs, wearables and devices, imaging, scanning, and cameras. All of these life science areas may be supported by federal and state R&D Tax Credits.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Lauren Chin is a Tax Analyst at R&D Tax Savers.

Robert Goulding is a CFA and Investment Professional with R&D Tax Savers


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