Are You Leveraging the R&D Tax Credit?
Are You Leveraging the R&D Tax Credit?
As healthcare evolves in response to the five forces disrupting the industry, investment in tech is no longer an optional strategy. Patient care is evolving, financial and clinical outcomes are intertwined, new entrants are changing the model, and healthcare IT and tech will underpin it all. It will be the difference between success and failure, and in some cases, life or death.
Indeed, the healthcare industry is investing billions of dollars in healthcare IT solutions to create data-driven efficiencies and connections across the healthcare ecosystem. In fact, in 2016, the U.S. healthcare industry spent $161.7 billion on R&D, second only to IT. These new solutions take time, energy, resources and research. And it’s just one of the many demands a healthcare organization must meet.
Another is taxes. Cost pressures, competition and the transformational forces noted above have made tax optimization more important than ever. Many organizations are leveraging various federal and state tax incentives, enabling them to hire additional employees, invest in new technologies and finance other business objectives. But healthcare organizations consistently overlook key opportunities to leverage the research tax credit to help offset the costs of digital transformation.
Analysts expect healthcare R&D will continue to increase at a fast pace as the industry works to evolve and solve emerging challenges.
Is Your Organization Eligible?
Healthcare organizations that finance projects to attempt to develop or improve products, processes, software, or technologies may be eligible to claim R&D tax credits. A healthcare organization’s efforts do not have to succeed or be revolutionary to qualify. Attempting to make incremental, evolutionary improvements may be eligible, and any organization paying employees or contractors to perform these types of activities should consider their eligibility.
Examples of potentially qualifying activities include attempting to develop or improve:
- Software applications to try to enhance the delivery of healthcare management services
- Algorithms to enhance fundamental or underlying computer processes, e.g. new or improved methods of sorting, searching, or compressing healthcare data
- Electronic medical record software solutions
- Software capable of complying with evolving HIPAA regulations and industry standards
- Blockchain for healthcare applications
- Internet of Medical Things
- Patient-engagement tools
- Payer/provider analytics/data tools
- Artificial intelligence for various tasks (nursing-related, administrative, etc.)
The credit benefits can be significant, including increasing cash flow by as much as 15 percent of qualified spending, reducing effective tax rates, and increasing earnings per share.
Credits for Cyber?
EMRs, telehealth, and connected medical devices have helped make data healthcare’s most valuable asset. Moreover, the market for the Internet of Medical Things is expected to reach $163 billion by 2020, according to eMarketer. Nevertheless, despite the sizable opportunity Internet of Medical Things and connectivity create, data management and security pose significant risks: Healthcare is one of the most targeted industries for cyberattacks, and regulators are making moves to require organizations to implement enhanced security measures to mitigate risk.
In this environment, many healthcare organizations are investing in software to improve the security of their information and reduce fraud, investments which can present opportunities to claim R&D credits.
In a recent example, our R&D professionals helped one healthcare organization save $10.5 million in R&D tax credits for its activities to develop software to improve security. Around 200 of the organization’s employees and 20 contractors directly contributed to the efforts to develop the new software, and BDO helped design and implement the processes the organization used to identify and document their credit benefit.
Don’t Leave Cash on the Table
In the wake of tax reform, many companies may be wondering how the R&D tax credit has changed and if they are still eligible.
The new tax law preserved the research tax credit and, due to other provisions, increased its value by 21 percent. It also created an opportunity for taxpayers who previously paid alternative minimum tax (AMT): Now that the AMT has been repealed, these taxpayers may identify and use R&D tax credits against any regular income tax liability they may have. And not just for 2018: All taxpayers can go back as many as 20 years, identify the credits they could have claimed during those years, and claim those credits today if they couldn’t have used the credits in either the year prior to the tax year in which the credits were generated or a successive year closed by the statute of limitations.
Because of this and the kind of legal and technological developments outlined above, many healthcare organizations are leaving cash on the table.
If you think you might be, use our R&D Tax Credit Calculator to find out.