Biotech Tax Credit Top Issues: Questions and Answers with RoseRyan
Last fall, many Bay Area biotech companies received significant awards from the Treasury Department’s Qualifying Therapeutic Discovery Project program, which doled out more than $1 billion total in grants and tax credits to encourage projects. If you were among them, you’ve now put those dollars to work, and it’s important to make sure you record the awards accurately to ensure that they stand up to scrutiny and that you get the proper credit.
How the accounting is handled depends on whether you chose to receive a tax credit or a grant. The tax credit means you get a credit on your taxes for the expenses; with the grant, you’re getting reimbursed for expenses. Accounting for grants differs from “regular” accounting. It’s more complex, and you need to track expenses clearly. This Q&A should help you get the basics in order. (You should check with your accounting and tax advisors to confirm details.)
When can I use the grant money? Is there a time limit?
These awards apply to spending in 2009 and 2010. Funds can be requested within 30 days of the first day of your company’s 2011 tax year. If you received your grant for 2009 expenditures, you will need to amend that tax return to reduce any Research & Development tax credit and reflect the grant revenue.
I received more than one grant. Can I record them together?
You need to make sure that funds for multiple grants are recorded separately—your expenses should be identified up front as applying to one project or the other. Similarly, you don’t want to leave out anything that can be captured. This reporting is usually pretty straightforward; it just needs to be broken out so that it can easily be audited.
How closely is the government tracking these grants? Will I be audited?
We have no way to know if you’ll be audited or what might trigger an audit. In any case, it’s always best practice to handle all accounting properly, so make sure all the expenses are clearly recorded and connected to the project or projects referenced in your application.
How do I make sure my recordkeeping will stand up to an audit?
Work with an accountant who has experience handling the accounting for grants. There needs to be a clear trail from expense/documentation to the grant-funded project; project expenses should be clearly segregated in the accounting system and have the appropriate supporting documentation, such as invoices. If possible, you may want to have timesheet documentation that identifies employee time on the grant project.
Do I have to be prepared to discuss the project and funding in its entirety?
Yes, if you get audited or are otherwise required to do so, for example, by another granting organization or potential investor. And if your corporate governance or ownership has changed since the grant was awarded, you must describe the change in detail, including any changes to indirect owners, partners, or shareholders. The government understands that business arrangements may change but it needs to be carefully tracked.
Do I need to show that my grant money has had an impact in meeting the government’s desired outcome of increasing jobs?
Be sure to find out what the reporting requirements require. Many government grants do have reporting requirements. It’s always good practice to make sure that you have paperwork that supports your own grant and project goals, and that you keep complete and accurate records of grant program expenses—including hires and employee time as well as equipment and other expenses.
Can my grant or tax credit be used to secure other funding?
Getting a grant doesn’t mean that you’ll have an easier time securing other funding. However, government awards can demonstrate a level of credibility and influence potential investors.
I got a tax credit rather than a grant. When can I apply the credit?
Check with your accounting and tax advisors on specific rules and to be sure you’re recording the tax credit correctly. Generally, tax credits apply to the quarter in which you used the funds. However, research and development expenses could fall as R&D tax credit and could be carried for a number of years, then taken when your company is profitable.
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