Special Topic: Biotech & R&D Assets 2025 & 2026
- Rebecca Tabert, CPA
- Oct 24
- 13 min read
Are you managing or investing in a biotech company and wondering how to properly treat R&D costs and assets? Understanding the difference between R&D assets, expenses, and credits can unlock significant tax benefits and help you better present your company’s true financial position.
In the biotech industry, research and development (R&D) represents the heart of innovation and long-term value creation. However, the accounting and tax treatment of R&D activities can be complex, involving distinctions between what is capitalized as an asset, what is deducted as an expense, and what qualifies for a tax credit. Understanding these differences is essential not only for compliance but also for maximizing available incentives and building investor confidence.
What is an R&D Asset, R&D Credit, and R&D Expense, and how are they different in a biotech company?
Overview (book vs. tax):
R&D expense (book/GAAP):
Under U.S. GAAP (ASC 730), most research & development outlays are expensed as incurred on the income statement. Limited exceptions exist when an item has alternative future use (e.g., general-purpose lab equipment)—that portion may be capitalized as PPE or another asset.
R&D asset (book/GAAP):
A balance-sheet item representing tangible or intangible resources with future benefit (e.g., specialized equipment with use beyond a single project; acquired in-process R&D in a business combination). Current FASB work also addresses R&D assets acquired in asset acquisitions and contingent consideration measurement—important in biotech where asset deals are common.
R&D expense (tax):
Starting with tax years beginning after Dec. 31, 2024, U.S. domestic research or experimental (R&E) costs may be immediately deducted under new IRC §174A (enacted by the One Big Beautiful Bill Act, P.L. 119-21). Foreign R&E costs still fall under §174 and must be capitalized and amortized over 15 years. Pre-2025 domestic costs generally followed TCJA §174 capitalization rules unless you make permitted method changes/elections.
R&D credit (tax):
The §41 research credit (Form 6765) is a separate incentive based on qualified research expenses (QREs)—wages, supplies, and certain contract research meeting the §41(d) “qualified research” tests. You can also elect the §280C reduced credit and, for eligible startups, apply part of the credit against payroll tax.
How they differ in practice (biotech focus):
R&D expense vs. R&D asset (book):
GAAP pushes most internal R&D to expense; only items with alternative future use (e.g., a centrifuge) become assets. Acquired IP/IPR&D in a business combination is recognized as an intangible asset; in asset acquisitions, proposed updates clarify recognition/measurement—including earnouts—which biotech frequently uses.
R&D expense (tax) vs. R&D credit:
Deduction (§174A/§174):
Determines when/how much of your R&E costs reduce taxable income (immediate for domestic under §174A in 2025+, amortized for foreign; special transition options via Rev. Proc. 2025-28).
Credit (§41):
Rewards the increase/level of qualifying research activity—independent of whether you expense or capitalize for tax. The definitions interact (e.g., SRE under §174 informs §41 scope), but eligibility and computation rules for the credit remain under §41 and its regs.
Coordination rules:
If you claim the credit, §280C may require reducing your deduction (or you can elect the reduced credit to avoid an add-back). Form 6765 instructions provide current mechanics.
What commonly counts as “R&D” in biotech (examples, then where they land):
Preclinical research, assay development, animal studies, IND-enabling work, Phase I–III clinical trials, bioprocess development, software for bioinformatics, and prototype/pilot model work to resolve technical uncertainty.
Book (ASC 730):
generally expensed; capitalized only if an asset has alternative future use (e.g., multi-project equipment).
Tax (2025+):
Domestic costs can be currently deducted under §174A; foreign costs still capitalized over 15 years; contract research scoping/ownership delineations follow recent IRS notices.
Credit:
Portions may qualify as QREs if they meet §41(d) tests (permitted purpose, elimination of uncertainty, process of experimentation, technological in nature) and are in eligible categories (wages, supplies, 65% of certain contractor costs). See Form 6765 and IRS §41 page.
Key 2025+ rule changes and procedural guidance to know:
§174A (Domestic R&E immediate deduction):
Effective for tax years beginning after 12/31/2024; adds elections and method-change procedures (transition rules, cut-off vs. §481(a), retroactive relief options for certain small businesses). Rev. Proc. 2025-28 explains how to adopt §174A and coordinate with prior §174 capitalization.
Foreign R&E unchanged:
Still capitalize and amortize over 15 years under §174 (no expensing under §174A). Plan early to track domestic vs. foreign at source.
Continuing interim guidance for SRE and contracts:
Notice 2023-63 (as clarified by Notice 2024-12) covers definitions, software, contract research (provider vs. recipient), and other mechanics—still relevant for foreign R&E and categorization.
Research Credit remains intact:
Latest Form 6765 (Rev. Jan. 2025) instructions confirm §41 mechanics, reduced-credit election under §280C, and payroll-tax election details.
Bottom line for biotech:
Financial reporting (GAAP):
Expect most internal R&D to hit expense, with assets primarily for alternative-use equipment and acquired intangibles (IPR&D).
Tax (2025+):
Separate your domestic vs. foreign R&E. Domestic can be expensed immediately under §174A; foreign remains capitalized. Independently evaluate the §41 credit—often material for biotech burn-stage companies. Use Rev. Proc. 2025-28 procedures to adopt/transition.
What are the main R&D assets of a biotech company?
Below are the asset categories most commonly found on a biotech balance sheet that directly support R&D. (Note: GAAP generally expenses internal R&D; assets arise when items have alternative future use or are acquired rather than internally developed.)
Tangible R&D assets (Property, Plant & Equipment)
Specialized laboratory equipment (e.g., centrifuges, biosafety cabinets, sequencers) used across multiple projects—capitalized and depreciated when they have alternative future use beyond a single study.
Pilot-scale or process-development equipment (bioreactors, chromatography skids) that supports repeatable manufacturing/process R&D across programs.
Lease-related right-of-use (ROU) assets for lab/office space and leased equipment recognized under ASC 842 (operating or finance lease), commonly material for life sciences tenants.
Intangible R&D assets (acquired or capitalized in limited cases)
Acquired in-process R&D (IPR&D) recognized at fair value when purchased in a business combination (e.g., programs, platforms, or drug candidates not yet commercially viable). IPR&D is an indefinite-lived intangible until completion or abandonment.
Licenses and collaborative rights (e.g., compound licenses, platform access) acquired from third parties and recorded as intangible assets when they convey identifiable economic benefits.
Patents and legal/IP registration costs directly associated with acquired technology (booked as intangible assets when they enhance or protect a recognized intangible).
Software used in R&D (bioinformatics, data-analysis pipelines): internal-use software may be capitalized only for specific stages/criteria; otherwise expensed under ASC 730. (Biotech teams should separate internal-use/application-development software from research coding work.)
Contracting and funding-related assets (presentation/measurement nuances)
Prepaid R&D services to CROs/CMOs (advance payments for trials, tox studies, manufacturing runs) are recorded as prepaid assets and expensed as services are rendered—helpful to distinguish from capital assets.
Contingent consideration arrangements tied to acquired R&D (milestones/earn-outs) affect the measurement of acquired intangibles and subsequent fair-value changes—not an R&D asset by itself, but integral to accounting for IPR&D deals common in biotech.
Practical takeaways
Expect most internal R&D (preclinical through clinical) to be expensed, not capitalized; assets arise mainly from multi-use equipment, leases (ROU assets), and acquired programs/IP.
Maintain clear capitalization policies: define “alternative future use,” document asset lives, and segregate acquired intangibles from internally developed R&D that remains expense under ASC 730.
Who is required to record and report R&D assets in a biotech company?
In a biotech company, the responsibility for recording and reporting R&D assets depends on corporate structure, size, and stage of development, but all organizations involved in scientific innovation must follow both financial reporting standards (GAAP/IFRS) and tax compliance regulations (IRS and state-level). Each role below carries distinct duties to ensure R&D assets are properly documented, valued, and reported.
Management and Executive Leadership
CFOs, controllers, and accounting managers hold primary responsibility for ensuring accurate recognition, capitalization, and disclosure of R&D assets under ASC 730 (R&D), ASC 350 (Intangibles), and ASC 842 (Leases).
In small biotech startups, this role may fall to the CEO or COO, often with external CPA guidance.
Key responsibility (2025 onward): integrate the new §174A domestic R&D deduction rules into the company’s accounting policies and tax provision models.
Finance and Accounting Teams
Prepare journal entries for purchased equipment, prepaid R&D contracts, and intangible assets.
Track amortization schedules for capitalized costs (foreign §174 costs amortized over 15 years; domestic deductible under §174A from 2025 onward).
Reconcile book vs. tax differences, for example, ASC 730 expenses may still require capitalization under IRS §174 for foreign R&D, creating deferred tax assets (DTAs).
Maintain supporting documentation such as vendor invoices, project cost allocations, and evidence of “alternative future use” for capitalized assets.
Scientific and Technical Leads
Principal investigators, lab directors, and project managers provide the technical substantiation for identifying which costs qualify as R&D under both accounting and tax frameworks.
Their data support decisions on which activities qualify for R&D credits under §41, as well as what equipment or software meets capitalization criteria.
They must maintain contemporaneous records, experiment logs, project reports, and cost breakdowns, that accountants rely on for substantiation.
External Professionals
CPAs and tax professionals assist in determining which expenditures qualify for R&D credits, deductions, or capitalization, preparing Forms 6765 (R&D Credit) and 4562 (Depreciation/Amortization), and reconciling §174 adjustments.
Valuation specialists may be engaged to determine fair value of acquired IPR&D or intangible assets in mergers and acquisitions (M&A).
Auditors (external or internal) verify compliance with GAAP reporting and IRS requirements, particularly around capitalization thresholds, impairment testing, and disclosure accuracy.
Regulatory and Compliance Officers
For public biotech companies, SEC reporting requirements (Form 10-K, 10-Q) mandate detailed R&D disclosures under Item 303 of Regulation S-K, including costs, capitalization policy, and significant acquisitions.
Private companies must still adhere to ASC standards and maintain defensible documentation, especially if seeking venture capital, federal grants (SBIR/STTR), or preparing for future IPOs or acquisitions.
Biotech firms receiving federal funding may also have additional OMB Uniform Guidance reporting obligations.
Practical takeaways for 2025 and beyond
All biotech companies conducting domestic R&D must align financial reporting (GAAP) and tax treatment (IRC §174A/§41) through well-defined policies and supporting documentation.
Clear role delineation, from scientists to accountants, is critical to avoid misclassification of assets and ensure maximized R&D incentives.
With the 2025 reintroduction of full domestic expensing and new IRS guidance under Rev. Proc. 2025-28, maintaining synchronized reporting between book and tax is more important than ever.
How are R&D assets in a biotech company different from other industries?
1) Long Development Timelines and Uncertain Commercialization
In biotech, drug discovery, preclinical trials, and regulatory approval (FDA or global equivalents) span long periods with uncertain outcomes.
Most R&D spending yields no immediate commercial product, which means far fewer opportunities to capitalize development costs compared to tech or manufacturing.
GAAP (ASC 730) requires internal R&D to be expensed as incurred, while only assets with alternative future use, such as reusable lab equipment, are capitalized.
In contrast, software or industrial firms can capitalize more costs once technological feasibility or prototype completion is reached.
2) High Concentration of Intangible Assets
A biotech company’s most valuable assets are intangible, patents, licenses, trade secrets, or proprietary biological materials.
Acquired in-process R&D (IPR&D) and collaboration rights are recognized as indefinite-lived intangibles until commercialization or abandonment.
Other industries (e.g., manufacturing or construction) derive asset value from tangible infrastructure, not from intellectual property under development.
Valuation of these intangible assets requires specialized expertise, especially for M&A and impairment testing under ASC 350.
3) Heavy Reliance on External Contract Research and Partnerships
Biotech companies often outsource large portions of research to Contract Research Organizations (CROs) and Contract Manufacturing Organizations (CMOs).
These contracts produce prepaid R&D assets, milestone-based payments, or contingent obligations that require specific recognition and disclosure.
Other industries typically conduct R&D internally, making cost allocation more straightforward.
Under IRS Notice 2023-63 and related 2025 guidance, contract research payments must be properly allocated between domestic (§174A deductible) and foreign (§174 capitalized) R&D activities for tax purposes.
What are the steps to categorizing the different forms of R&D in a biotech company?
Step 1: Identify the Type of R&D Activity
Categorization begins by mapping out where in the biotech development lifecycle the costs occur:
Basic Research: Laboratory discovery, target identification, or molecular analysis with uncertain outcomes → typically expensed under ASC 730 and may qualify for §41 credit.
Applied Research: Early-stage development of a product candidate (e.g., cell-line development, vaccine formulation) → expense for book, deductible or creditable for tax.
Experimental Development: Preclinical testing, process optimization, or formulation design → may qualify for §41 credit and should be tracked separately from manufacturing costs.
Clinical Trials (Phases I–III): Regulatory testing phases, expensed for book but capitalized for tax if foreign; domestic may be deducted under §174A.
Post-Approval Development: Lifecycle management, dosage modification, and ongoing studies may be considered development rather than research and handled per product-specific capitalization rules.
Step 2: Classify Each Cost Element
Once the R&D phase is identified, classify individual cost types to ensure proper reporting:
Wages and Salaries: Direct compensation for scientists and engineers performing qualified research, often the largest component of QREs under §41.
Supplies and Consumables: Chemicals, reagents, prototype materials, and lab consumables, eligible for credit and immediate expensing.
Contract Research Costs: CRO or CMO payments, track domestic vs. foreign contracts separately to distinguish between §174A (deductible) and §174 (capitalized) treatment.
Software Development: Bioinformatics and modeling systems may qualify for R&D credit under §41(d) but follow separate capitalization rules under ASC 350-40.
Depreciation or Lease Costs: Include allocable depreciation for lab equipment used in R&D and right-of-use assets under ASC 842.
Step 3: Distinguish Book vs. Tax Treatment
Biotech companies must maintain parallel ledgers for GAAP and tax reporting because rules diverge significantly.
Book (GAAP):
Expense most R&D immediately unless it has alternative future use.
Capitalize only tangible assets or acquired IPR&D.
Tax:
Domestic research → expensed immediately under §174A (from 2025).
Foreign research → capitalized and amortized over 15 years under §174.
Qualified research expenses → separately tracked for §41 R&D credit.
Pro Tip: Use distinct project codes and cost centers to automatically flag domestic vs. foreign R&D for accurate capitalization and credit tracking.
Step 4: Evaluate for R&D Credit Eligibility (§41)
Once categorized, test each activity against the IRS’s four-part test under §41(d):
Permitted Purpose: Is the research aimed at creating new or improved functionality, performance, reliability, or quality?
Technological in Nature: Is it based on physical or biological sciences, engineering, or computer science?
Elimination of Uncertainty: Does it attempt to resolve uncertainty in capability, method, or design?
Process of Experimentation: Is a systematic trial or testing process used?
If all are met, costs can be included as Qualified Research Expenses (QREs) for credit purposes.
Step 5: Determine Capitalization Requirements
For costs that do not meet §41 criteria but have potential future benefit:
Capitalize items that create a reusable resource (e.g., multi-project lab machinery, patents, IPR&D).
Expense those tied to single-use or project-specific research.
Document “alternative future use” with internal memos or technical reports for audit support.
Step 6: Record and Reconcile
At period-end:
Record R&D costs into distinct accounts:
R&D Expense (GAAP)
Capitalized R&D Assets
Deferred Tax Assets (foreign §174 amortization)
Reconcile the book vs. tax difference in your fixed-asset and intangible schedules.
Prepare documentation packages for:
R&D Credit (Form 6765)
Amortization (Form 4562)
Financial Statement Disclosure (ASC 730 & ASC 350)
Step 7: Maintain Contemporaneous Documentation
Proper documentation supports compliance and substantiates credits:
Technical reports, experiment logs, or trial results.
Vendor invoices and contract terms for CROs/CMOs.
Capitalization memos explaining accounting judgments.
Allocation workpapers distinguishing domestic vs. foreign R&D.
IRS examinations of biotech R&D increasingly emphasize real-time tracking and technical substantiation rather than after-the-fact reconstructions.
Practical takeaway: By systematically identifying the R&D phase, classifying costs by type and geography, and documenting both scientific intent and financial treatment, biotech firms can align with 2025+ tax law and maintain transparent, audit-ready records.
Most common myths about R&D assets in a biotech company
Myth: All R&D spending can be capitalized as an asset.
Reality: Under ASC 730, internal R&D must be expensed as incurred unless it results in an asset with alternative future use (e.g., reusable lab equipment). Intellectual property or discoveries developed internally are not capitalized until commercialization or acquisition. For tax purposes, domestic R&D is immediately deductible under §174A (2025 onward), while foreign R&D must still be capitalized and amortized.
Myth: You can only claim the R&D credit if you have a product on the market.
Reality: The R&D Credit (§41) applies to qualified research activities, not successful outcomes. Activities that aim to eliminate uncertainty, develop prototypes, or conduct preclinical testing can qualify even if the final drug fails. The IRS focuses on the process of experimentation, not commercial success.
Myth: Only large corporations qualify for R&D credits.
Reality: The R&D payroll credit election allows small or startup biotech firms, those with under $5 million in annual receipts, to apply up to $500,000 of R&D credits toward payroll taxes instead of income taxes. This rule benefits early-stage biotech companies that have no revenue but still spend heavily on domestic innovation. Many startups miss this benefit due to lack of awareness or poor cost tracking.
Myth: All R&D capitalization rules were repealed in 2025.
Reality: While §174A allows immediate deduction for domestic R&D starting with tax years beginning after December 31, 2024, foreign R&D must still be capitalized and amortized over 15 years under §174. Many biotech firms run trials, toxicology studies, or data analytics abroad, those costs remain deferred. Companies must continue tracking location-based segregation of R&D activities.
Myth: Patents and licenses automatically qualify for the R&D credit.
Reality: The §41 R&D credit applies to the process of experimentation, not to the ownership of intellectual property. Simply purchasing a patent or license doesn’t qualify, because the company didn’t perform the underlying scientific work. Only direct research activity, for example, improving or testing that patent’s technology, may qualify if it meets the IRS’s four-part test.
(FAQ) Frequently asked questions about R&D assets in a biotech company
Question: Do preclinical studies and animal trials count as R&D for tax purposes?
Answer: Yes. Preclinical research, animal studies, and assay development qualify as research or experimental (R&E) activities under §174 and often as qualified research expenses (QREs) for §41 credits, if the work aims to eliminate uncertainty through experimentation. Proper documentation of objectives, protocols, and results is key to substantiation.
Question: Can we still deduct foreign R&D costs after 2025?
Answer: Not immediately. While domestic R&D is now deductible in the year incurred under §174A, foreign R&D (including overseas CRO or CMO work) must still be capitalized and amortized over 15 years under §174. This distinction remains a major compliance issue for global biotech companies and must be tracked carefully.
Question: If we buy another company’s drug program, is that R&D expense or an asset?
Answer: It depends on how the acquisition occurs. In a business combination, the purchased drug program or technology is recognized as acquired in-process R&D (IPR&D), an indefinite-lived intangible asset under ASC 350. In an asset acquisition, capitalization rules differ slightly, and post-acquisition development costs are expensed as incurred.
Question: Can failed projects or abandoned trials still create tax benefits?
Answer: Yes. When an R&D project is abandoned, any remaining unamortized §174 or §174A costs may be deductible in that year. Additionally, the activity leading to failure can still qualify for the R&D credit (§41) if it met the four-part test. In biotech, failed studies are often a normal and necessary part of scientific advancement, and remain deductible.
Question: How should we handle leased lab space and shared research facilities?
Answer: Leased facilities are recognized under ASC 842 as right-of-use (ROU) assets, with related lease expenses allocated to R&D if they support experimental work. Shared facilities and incubator spaces should be allocated based on usage percentages to ensure proper classification for both book and tax purposes.
More Reading
Final Thoughts
Research and development is the foundation of every biotech company’s value, yet it is also one of the most misunderstood areas of accounting and tax compliance. With the 2025 reinstatement of immediate domestic R&D expensing under §174A, biotech firms now have an opportunity to improve cash flow and strengthen their financial presentation, but only if their R&D tracking and documentation are precise.
From a compliance standpoint, success depends on coordination: scientists must define what qualifies as R&D, accountants must align it with ASC 730 and §174/§41 rules, and leadership must ensure consistent policies across book and tax reporting. The difference between a missed credit and a defensible deduction often comes down to careful recordkeeping and informed professional oversight.
If your biotech company conducts research in multiple countries, partners with CROs, or plans to acquire or license new programs, now is the time to consult a CPA or tax professional experienced in biotechnology. Understanding when to capitalize, deduct, or credit R&D expenditures is not only about compliance, it’s about protecting the true value of your innovation.
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