The R&D Tax Credit Aspects of Cosmetics

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        The United States is one of the biggest cosmetic markets in the world. In 2012, it registered revenue of more than $54 billion and a work force of around 53,600 people. In the same year, the value of the global cosmetics industry reached an all-time high of more than $195 billion.

        In addition to being more valuable than it has ever been in the past, the cosmetics industry is certainly more dynamic and innovative than ever. This highly competitive sector is driven by constantly evolving needs and ever-rising standards and, therefore, must be built on innovation.

        The present article will discuss the role of innovation in the cosmetics industry and present the federal tax credit opportunity available for companies investing in cosmetics R&D.

The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% 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 up to $250,000 per year in payroll taxes.

The Role of Innovation in Cosmetics

        Innovation is key for the cosmetics industry. The beauty market is driven by the constant challenge of offering the best products for consumers. In the fast-moving world of cosmetics, success is dependent on how well a company can innovate.

        This highly competitive segment is characterized by a combination of increasingly resourceful and demanding consumers and a multitude of available products. For this reason, innovation has the ultimate mission of understanding consumers' desires and developing competitive products targeted at unmet market needs.

        In a context of shifting trends and fickle wants, cosmetics innovation and marketing are deeply intertwined. Innovation must ally technical advances with the consumer perception of relevance, resonating with consumer insight. It must be quick and timely, demonstrating the ability to identify burgeoning trends. And, lastly, it must satisfy consumer expectations, living up to its promise.

Recent Trends in Cosmetics R&D

        The positive performance of the cosmetics industry has been corroborated by the expansion of thriving technologies, such as bio- and nano-tech, and the increasing demand for certain segments of products, including organics, anti-aging, and male grooming. The following paragraphs will present recent breakthroughs and outstanding challenges in some of the most promising fields for cosmetics R&D.

  1. Organic and Bio-based Cosmetics
    The growing demand for bio-ingredients has played an important role in the cosmetics market. Fueled by increasing health concerns and ever more discerning consumers, natural and bio-based technology is expected to be major drivers of future growth.

    The innovative use of bio-ingredients is an important area for cosmetics R&D activities. Products of the hive, such as honey, pollen, venom, and royal jelly, for instance, are increasingly used in face cream and serums. These substances allegedly possess salubrious properties that favor increased blood circulation and skin hydration. Tamanu, oil derived from nuts found in the South East Asia and the Polynesian Islands, is also an example of novel bio-ingredient being used in cosmetics. The oil is supposed to heal scars, assist skin reparation, and soften lines and wrinkles.

    Organic and natural products are increasingly popular and many companies are taking advantage of the pro-natural trend. For now, however, they remain a small percentage of the market. Improved R&D will be necessary before these products achieve cost-effectiveness while complying with safety regulations. One of the major challenges is replacing artificial preservatives without compromising efficacy and safety.

  2. Nanotechnology Advancements in Cosmetics
    Nanotechnology is increasingly used to enhance the power of cosmetics, specially sun care and anti-aging products. Nanotechnology is the science of manipulating matters on a molecular or atomic scale. In other words, what characterizes this branch of technology is its focus on extremely small dimensions and tolerances - less than 100 nanometers (billionths of a meter).

    Nanostructured materials present unique properties, which are not present in their bulk form. Therefore, nanotechnology opens a world of opportunities to different industries and particularly to the cosmetics one. While nano-enhanced products become ever more common, their safety is still subject of controversy and their regulation remains unclear.

    For now, the most frequent uses of nanotechnology in personal care products are UV filtering and the delivery of active ingredients to the skin cells. The number of nanoformulated products is rising and beginning to include nanoemulsions and nanocrystals. Cosmetic giant L'Oreal is devoting around $600 million to nano patents and has already patented dozens of "nanosome particles".

    Although highly efficient, nanomaterials can have negative effects. Their physical and chemical properties have not yet been fully understood and, therefore, can present unforeseen toxicity. This is particularly problematic in the case of cosmetics, which have direct contact with human skin. Impacts on the environment are also cause of concern, as nanomaterials can be released into the water, air, and soil during the production, use, or disposal of nano-enhanced cosmetics.

    R&D efforts aimed at taking advantage of nanotechnology to develop new and improved cosmetics are bound to intensify in the near future. Clarifying the effects of nano-enhanced cosmetics and the potential health risks involved are also important areas of research.

  3. Biotechnology Innovations
    Biotechnology can be defined as technology based on biology. It leverages cellular and biomolecular processes in the development of products and technologies. Modern biotechnology has enable major breakthroughs in the fight against rare diseases, the development of more efficient industrial manufacturing processes as well as in the reduction of the environmental footprint.

    In the world of cosmetics, biotechnology has played an important role in the creation of innovative products and processes. The development of alternatives to oil-sourced ingredients is a promising field for biotech cosmetics innovation. Cosmetic manufacturing increasingly incorporates the notion of "biorefinaries", in other words, they rely on renewable resources such as farmed, marine, and forestry biomass, and follow the principles of green chemistry.

    Marine biotechnology is a particularly fruitful area of research. From microorganisms to krill, all marine life can potentially be used in developing personal care solutions. A recent report by Technavio demonstrated that marine-based cosmetics have significant appeal in the US and Western Europe, which concentrate 50 percent of demand. Promising research efforts include the use of microalgae that could promote cell restoration and cohesion. The scalability and economics of algae exploitation, however, remain challenging. Arizona-based Heliae is engaged in producing "high-value algae" for the personal care industry through its innovative Volaris platform, which combines phototrophic and heterotrophic models.

    Biotechnology can also contribute to expanding the availability of bio-resources. Increasing plants' productivity, growing wild species in bioreactors, and reproducing naturally rare molecules are a few examples of potential biotech applications. The creation of more effective and environmentally friendly extraction processes is also a vibrating area of research, particularly through the use of enzymatic procedures.

  4. Anti-aging
    The use of stem cells is a vibrating field for anti-aging research. Stem cells are responsible for renewing and repairing the epidermis, dermis, hair, and nails. They are rare cells, which possess impressive capacity for proliferation. Due to their very nature, stem cells can revolutionize anti-aging treatments. Research has focused on protecting the environment of stem cells in order to counter their natural loss of regenerative potential that happens with age. Similarly, researchers have aimed at preserving the stem melanocytes and keratinocytes present in the hair, which diminish with time causing graying and hair loss.

    Other innovative efforts include the development of personalized face creams with one's own stem cells (isolated from abdomen fat tissue), and the use of stem cells from plants, bovine embryonic fluid, and even unfertilized human eggs. Located in New Jersey, Personal Cell Sciences Corp., was listed on Forbes' top 10 fashion and beauty startups for 2012. The company's U Autologous Skin Care products use stem cells from each patient's own fat tissues.

    Significant R&D will be necessary before the full potential of stem cells in anti-aging treatments is realized. Still experimental and controversial, the use of stem cells seems, however, to be an unavoidable piece of cosmetics innovation.

    Genomic technology is also an important field for anti-aging innovation. There are differences in gene expression between young and old skins. With time, the presence of certain proteins in the skin decreases. The objective of genomic research is to identify the genes responsible for their production and formulate ingredients that can stimulate them. In other words, the challenge is to mobilize cosmetic compounds that can affect gene expression. Major cosmetic companies, such as Estee Lauder, Lancome, and Olay have already incorporated the genomic approach to some of their anti-aging solutions.

    Recent anti-aging research breakthroughs include the discovery of powerful anti-oxidants, such as acai berry, and other stimulators of collagen production, such as the protein activin. Skingenecell 1P, a synthetic amino acid that suppresses the production of serpin B3, a protein that causes dryness and roughness after UV exposure, is yet another example of innovation.

  5. Men's Grooming
    The increasing demand for male grooming products is an important driver of growth in the cosmetics industry. The fast-growing market of men's grooming experienced a 7 percent growth in 2012, with sales adding up to $34bn last year. From anti-aging creams to energy-boosting serums and body lotions, men are beginning to incorporate the use of cosmetics in their everyday routine. They have shown a rising interest in personal appearance and have grown comfortable using beauty products. For the first time in history, sales of men's toiletries were expected to surpass those of men's shaving in 2013.

    Promising innovation fields include deodorants, the second biggest category for male grooming. Hair care products have also gained increased relevance, as market leaders, such as Procter & Gamble and Unilever, begin to offer a wider range of such products. Multi-functional solutions also promise significant growth, particularly due to the convenience of combining a number of benefits in one product.

    Men tend to spend limited time in grooming, therefore the importance of simplicity and multi-functionality. Recent R&D efforts have focused on blurring the boundaries between categories. Examples include aftershave and shaving products that offer hydration and anti-aging properties. While demand for makeup for men is still restricted to Asia, innovative efforts have edged into this area in the Western world. Estee Lauder, for instance, has developed a BB Tinted Moisturizer with solar protection, a multifunctional corrective and restorative product.

    Technologically advanced products and innovative packaging also play an important role in appealing to the male public. According a recent research from Mintel, serums are a particularly promising field for men's cosmetics. Offering concentrated formulas for maximum results as well as lighter textures, these products are highly attractive to male consumers.

  6. Innovative Packaging in Cosmetics
    In the cosmetics packaging segment, the ability to meet consumers' needs of convenience and performance must be associated with affordability and sustainability. To that end, packaging manufacturers are developing creative solutions and innovative technologies specially targeted at cosmetics.

    Recent trends include the move towards smaller sizes that can be carried on flights and the development of more functional, user-friendly applicators that respond to "time-poor" consumers. Style and design are also essential for this very trend-oriented industry. Rising environmental and health concerns, which explain the multiplication of organic and bio-based cosmetics, have also affected packaging. The preference for recyclable materials and the use of refill packaging, for instance, are increasingly common.

    R&D efforts are underway to incorporate organic and biopackaging into the cosmetics market. New materials, such as plant-based biopolymers, are a promising field for innovation. While most available alternatives are made from corn, research is taking place to enhance potato starch for bioplastic production and to foster the use polymer-producing bacteria.

    Headquartered in Minnetonka, MN, biopolymer company NatureWorks is the creator of Ingeo, a low-carbon footprint polymer made from plant sugars. The material is already used in cosmetics, such as lipsticks. The company also produces a bioresin, resistant to high temperatures of up to 248˚ F. This innovative product is particularly interesting for cosmetics, as it eliminates the risk of deformation because of heat.

    Although biomaterials may be the future of cosmetic packaging, significant R&D efforts will be necessary to overcome outstanding challenges, such as the issues of solubility and product visual identity.

Challenges Ahead for Cosmetics

        The cosmetics industry must face significant challenges, which are expected to intensify in the near future. Growing health concerns and regulatory barriers are among them. The establishment of animal testing bans will also affect the industry, particularly in Europe, where the ban became effective on March 2013.

        R&D efforts are already underway to develop alternatives to animal testing. Promising areas for innovation include 3D printing, which can potentially be used to print micro-tissues and micro-organs for testing; the use of fabricated cornea made of human corneal cells cultivated in collagen; and the organs-on-chips technology.


        The cosmetics industry is in constant evolution. Innovation plays a central role in this fast-moving, highly competitive market. Recent trends in cosmetics research include the shift towards organic and bio-based products, the use of nano and biotechnology, the development of innovative men's grooming and anti-aging solutions, and the use of sustainable packaging. Companies engaged in R&D activities related to any of these fields may be entitled to significant federal tax credits.

Article Citation List



Andrea Albanese is a Manager with R&D Tax Savers.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

Charles G Goulding is a practicing attorney with experience in R&D tax credit projects for a host of industries.

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