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Special Topic: Biotech & Accounting 2025 & 2026

  • Writer: Rebecca Tabert, CPA
    Rebecca Tabert, CPA
  • 3 days ago
  • 9 min read

How is accounting different in the biotech industry? As research-heavy companies navigate funding cycles, R&D credits, and investor expectations, specialized accounting becomes the backbone of their financial success.


The biotechnology industry operates at the intersection of science, innovation, and finance, where complex research meets equally complex accounting. From R&D capitalization to grant tracking and investor reporting, biotech companies must maintain precise and transparent financial systems to support their long-term goals. Strong accounting practices are not just about compliance; they provide the framework that allows biotech firms to secure funding and bring scientific breakthroughs to market responsibly.


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What kind of accounting is required for the biotech industry?

Accounting in the biotechnology industry requires a deep understanding of both financial principles and scientific operations. Because biotech companies rely heavily on research and development, their accounting systems must be built to handle unique challenges such as R&D tax credits, grant funding, and long project timelines with uncertain outcomes.


Most biotech firms use accrual accounting, which records income and expenses when they are earned or incurred rather than when cash changes hands. This method gives investors and stakeholders a more accurate view of financial health, a key reason it is preferred by C-Corporations and other investor-oriented entities.


Key accounting areas in biotech include:

  • R&D Expense Tracking: Recording and classifying all research-related expenses accurately to support R&D credit claims and potential capitalization under IRS Section 174. Keep in mind, this is an audited area, and all R&D studies should be through, complete, and accessible in case of request.

  • Grant and Funding Management: Tracking restricted and unrestricted funds, ensuring compliance with government or institutional grant requirements.

  • Accrual Accounting: Recognizing revenue and expenses in the correct period to reflect financial performance, especially critical when contracts and trials span multiple fiscal years. Often, for tax purposes, accrual accounting should be elected for from the start, and if a transition is made after initial tax filing, the Form 3115 should be filed to request the change. Be sure to contact an experienced professional for the Form 3115, as it is complex and may have consequences depending on the circumstances.

  • Capitalization of Costs: Determining when to capitalize versus expense certain development or intellectual property costs in accordance with GAAP and tax compliance rules. Be sure to understand the different reporting requirements and standards in both financials and taxes.

  • Inventory and Production Accounting: For companies progressing from research to manufacturing phases, managing valuation and cost-of-goods sold (COGS) becomes essential.


Biotech accounting requires more than standard bookkeeping. It demands foresight and adherence to regulations that ensure every dollar spent on innovation is properly documented and optimized. You cannot take certain deductions or credits, such as the R&D credit, without proper documentation.

 


Who can do the accounting for the biotech industry?

While a Certified Public Accountant (CPA) is not always required for day-to-day operations, biotechnology accounting is a specialized field that benefits greatly from experienced professionals who understand both technical compliance and the industry’s unique financial landscape. The right choice depends on a company’s stage of growth, funding structure, and reporting requirements.


Key distinctions to consider:

  • External Accountants or CPA Firms: Ideal for startups and small biotech firms that need professional oversight without maintaining a full internal accounting department. A CPA ensures compliance with GAAP, helps with R&D credit calculations, prepares for investor reviews, and can provide audited financial statements if required.

  • Internal Bookkeeper or Controller: Larger or growing biotech companies often hire an internal professional to manage day-to-day bookkeeping, payroll, and expense tracking. Internal staff can provide real-time visibility but still benefit from periodic external CPA review.

  • Cash vs. Accrual Bookkeeping: Many early-stage biotech companies start with cash-basis accounting to simplify recordkeeping but later transition to accrual accounting to align with investor and regulatory expectations. Accrual accounting is generally required for C-corporations and those seeking venture capital or public funding.

  • Industry Experience Matters: Accountants with biotech experience are familiar with scientific cost structures, grant rules, and capitalization methods specific to R&D, allowing them to interpret financial data with greater accuracy.


In short, while any competent accountant can manage basic transactions, biotech accounting demands expertise that connects financial compliance to the realities of laboratory operations, funding cycles, and research-driven growth.

Why is biotech accounting so important?

Accounting in the biotech industry is not just about recordkeeping. It’s a strategic tool that determines whether a company can sustain innovation, attract investors, and remain compliant with tax and regulatory requirements. Because biotechnology ventures often operate for years before generating revenue, precise accounting ensures financial stability and credibility throughout the development cycle.


Key reasons biotech accounting is essential:

  • Investor and Lender Confidence: Accurate financial reporting helps investors understand the company’s burn rate, R&D spending, and runway. Transparent accounting builds trust, which is critical for securing venture capital, grants, or government funding.

  • Regulatory and Tax Compliance: Biotech companies must adhere to complex standards, including IRS Section 174 (R&D capitalization), GAAP requirements, and potential audits tied to grants or partnerships. Sound accounting practices protect the business from costly penalties or restatements.

  • R&D Credit Optimization: Proper documentation and classification of research expenses can lead to substantial federal and state tax credits, freeing up cash flow for further innovation. With new changes coming 2026 and onward, such as the OBBBA, these areas will go under greater scrutiny.

  • Operational Efficiency: Accounting systems designed for biotech streamline budget forecasting, clinical trial cost tracking, and project evaluation, allowing leadership to make informed strategic decisions.

  • Valuation and Exit Planning: Whether preparing for acquisition, merger, or IPO, accurate accounting supports due diligence and can significantly impact company valuation.


When should the accounting beginning for a biotech company?

Accounting for a biotech company should begin as soon as the entity is formed, long before the first experiment starts or the first investor check clears. Early accounting setup creates a financial foundation that supports compliance, transparency, and accurate reporting from the very beginning.


Key milestones to start or expand accounting processes include:

  • Entity Formation: Once the company is registered, establish an accounting system to track startup costs, capital contributions, and any initial R&D expenditures. These early expenses can often qualify for deductions or credits later.

  • First Round of Funding: When receiving investor capital, government grants, or research contracts, accounting controls must be in place to properly allocate funds, track restricted use, and report accurately to funders.

  • Initial Research and Development: As soon as lab work begins, accurate R&D tracking becomes essential for compliance under IRS Section 174 and for claiming R&D tax credits.

  • Hiring Employees or Contractors: Payroll, benefits, and contractor classifications must be documented correctly to ensure compliance with labor and tax laws.

  • Transition to Accrual Accounting: When the business gains investors, formal partnerships, or begins scaling operations, it’s critical to shift from cash-based to accrual accounting to meet financial reporting expectations.


Beginning accounting early allows biotech founders to avoid messy retroactive corrections, maximize potential tax credits, and build investor-ready financials that can grow seamlessly alongside their scientific progress. Early in this case means - you have opened your company, and the records begin there.

What are the steps for starting accounting for a biotech company?

Launching a biotech company involves more than groundbreaking research. It requires a structured accounting framework that can handle complex transactions, multi-year projects, and specialized tax considerations.


The following steps are on how to establish effective accounting practices from day one:

  1. Choose the Right Entity Type

    1. Most biotech companies form as C-Corporations, which allow for venture capital investment and facilitate stock-based compensation. Consult a tax professional to ensure your structure supports future funding goals and R&D credit eligibility.

  2. Select an Accounting Method

    1. Startups may begin with cash-basis accounting for simplicity, but accrual accounting is preferred once investors or complex contracts are involved. Accrual accounting aligns expenses and income with the periods they occur, improving visibility and compliance.

    2. You should start with one and stick to it to avoid having to file a Form 3115 and bring IRS scrutiny to your company.

  3. Establish a Chart of Accounts

    1. Customize your chart of accounts to capture biotech-specific categories such as R&D expenses, grants, lab supplies, intellectual property, and regulatory fees. This structure will make reporting and credit documentation far easier later.

  4. Implement an Accounting System

    1. Use reliable software (e.g., QuickBooks, NetSuite, or Xero) that integrates with payroll, inventory, and grant management tools.

    2. Cloud-based systems are ideal for biotech teams with remote collaborators and multi-site operations.

  5. Track R&D and Section 174 Expenses

    1. Maintain detailed records of all research activities, including wages, supplies, and contract research costs. These will support R&D tax credit claims and the capitalization requirements under IRS Section 174.

  6. Separate Restricted and Unrestricted Funds

    1. If your company receives grants or funding with specific usage conditions, ensure funds are segregated in the accounting system to meet audit and compliance standards.

  7. Set Up Internal Controls

    1. Establish approval processes for expenses, purchase orders, and reimbursements. Internal controls prevent misuse of funds and maintain credibility with investors and auditors.

  8. Engage a Professional Accountant or CPA

    1. Partner with a professional experienced in biotech accounting to review books regularly, prepare financial statements, and ensure compliance with industry-specific tax laws.


Most common myths about accounting in the biotech industry?

Myth: Accounting can wait until after funding.

Reality: Many founders assume that accounting only matters once investors are on board. In reality, early-stage accounting helps establish credibility and ensures that research expenses are properly documented for tax credits and compliance from the start. Waiting too long often leads to missed deductions, disorganized records, and costly rework.


Myth: Any bookkeeper can handle biotech accounting.

Reality: While general bookkeeping covers basic needs, biotech accounting involves complex R&D tracking, grant compliance, and capitalization rules. An accountant experienced in biotech understands how to document research costs under Section 174 and prepare investor-grade reports, something most generalists are not trained to do.


Myth: R&D tax credits are too complicated to bother claiming.

Reality: Although R&D credits require detailed documentation, they can result in significant tax savings or cash refunds. With proper tracking systems in place, these credits become a vital funding source, particularly for pre-revenue companies.


Myth: Accrual accounting is unnecessary for small biotech firms.

Reality: Cash accounting might seem simpler, but it doesn’t accurately reflect the long-term nature of research projects or contractual funding. Accrual accounting gives investors and management a clearer picture of ongoing obligations, project costs, and burn rate.


Myth: Grants and investor funds can be recorded together.

Reality: Mixing restricted grant funds with general operating funds can lead to compliance issues and inaccurate financial reporting. Properly segregating accounts ensures accountability to grant agencies and avoids audit complications later on.


(FAQ) Frequently asked questions about accounting in the biotech industry

Question: Do biotech startups need to hire a CPA right away?

Answer: Not necessarily, but consulting one early helps ensure your accounting system is set up correctly from the start. A CPA familiar with biotech can identify potential R&D credits, help select the right accounting method, and prevent costly mistakes that may surface later.


Question: What are the most common accounting mistakes in biotech?

Answer: The biggest errors include poor R&D documentation, mixing personal and business expenses, and failing to track restricted grant funds separately. These mistakes can disqualify a company from tax credits or raise red flags during audits or due diligence.


Question: How do biotech companies track research costs?

Answer: Successful firms maintain detailed cost records by project or experiment, categorizing wages, supplies, and subcontractor expenses. This documentation is essential for both accurate financial statements and qualifying for R&D tax incentives.


Question: Can a biotech company operate on a cash basis?

Answer: Yes, in the early stages, but once investors or multi-year contracts enter the picture, accrual accounting becomes essential. It aligns revenues and expenses properly and provides a clearer financial picture for funding rounds and reporting.


Question: How often should biotech companies update their financials?

Answer: Monthly financial reviews are ideal to monitor burn rate and budget compliance. Quarterly CPA reviews can further ensure accuracy, especially when preparing for tax filings, audits, or investor presentations.


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Final Thoughts

Accounting in the biotech industry is the structural backbone of innovation. From the earliest research phase to large-scale production, every financial decision influences funding potential, tax outcomes, and long-term sustainability. Establishing sound accounting systems early ensures transparency, supports R&D credit eligibility, and strengthens investor confidence.


Because biotech finances involve complex and evolving regulations, it’s wise to work with a tax professional experienced in the field. The right accounting guidance allows biotech companies to focus on what they do best, advancing science and discovery, while maintaining the financial precision needed to thrive.


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