The Anchin Orphan Drug Tax Credit team is well-positioned to assist companies in the Life Sciences industry maximize this benefit. We understand the science and the tax law and marry our knowledge of both to create value for our clients and lower the burden of scientific development.
The orphan drug tax credit (ODC) is a federal tax credit available to pharmaceutical companies working to find cures for certain rare diseases. A rare disease is defined as affecting fewer than 200,000 persons in the United States or affecting more than 200,000 persons in the United States, but for which there is no reasonable expectation that the cost of developing the drug and making it available in the United States will be recovered from sales in the United States. Before claiming the ODC, the drug or therapy developed by the taxpayer must be given an Orphan Drug designation by the Food and Drug Administration.
The Tax Credits and Incentives team at Anchin helps clients assess their ODC and other tax credits to ensure that maximum benefit is received. Anchin works with clients interested in claiming the credits for the first time, and clients who have difficulty meeting the contemporaneous documentation requirements needed to support their claims.
How is the ODC different from the R&D tax credit?
Taxpayers can achieve a rate of return of 25% on eligible wage, supply and contractor expenses under the ODC, compared to about 8% - 10% for the R&D tax credit. However, the qualifying expenses for the ODC must be associated with the human clinical phase of the drug’s development. Any costs outside of the human clinical trials could still be eligible for the R&D tax credit. Please note that the same costs cannot be claimed for both the ODC and the R&D credits.
A taxpayer that invests in the development of drugs to diagnose, treat, or prevent qualified rare diseases and conditions can claim an orphan drug tax credit equal to 25% of qualified clinical testing expenses incurred or paid during the development process (50% of qualified expenses for tax years beginning before 2018).
The ODC provides pharmaceutical companies an opportunity to increase cash flow and reduce the cost of their development operations. Taxpayers who take advantage of the ODC can offset their tax liabilities dollar for dollar. For companies in net loss positions, the ODC may be carried back one year and carried forward for 20 years until it can be used.