Case Study: Strategic Tax Review Yields Major Refunds for Pre-Revenue Biotech
How targeted tax review and technical expertise delivered over $720,000 in refunds and credits for a pre-revenue life sciences company.
Executive Summary
The client engaged Withum to uncover and resolve significant tax compliance issues, including misapplied R&D capitalization and overlooked Foreign Derived Intangible Income (FDII) deductions. Through Withum’s deep technical expertise and proactive approach, the client secured $160,000 in tax refunds and preserved $561,000 in valuable R&D credits. This collaboration not only lowered the company’s effective tax rate but also delivered sustained financial and operational advantages.
The Client
The Client is a growing biotech company in the United States. They are focused on diagnostics and therapeutic solutions for oncology and ophthalmic diseases using advanced imaging and screening technology and liquid biopsy for early-stage cancer detection.
The Challenge
The client encountered significant challenges with their previous CPA firm, primarily stemming from a lack of timely communication and inadequate responsiveness to inquiries. Additionally, there was a waning confidence in their prior CPA firm’s technical expertise and abilities.
The Approach and Solution
Withum took a thoughtful and thorough approach to understanding the Client’s situation, beginning with a review of prior work and identifying key areas for improvement. This process included:
- Amended Returns: After finding significant errors with the prior year tax returns, Withum promptly amended the client’s 2022 and 2023 returns to correct the issues.
- Executive Summary: At the Client’s request, Withum delivered a concise executive summary outlining the technical findings and projected benefits for the 2024 tax year.
- Technical Positioning: A technical memo was prepared to support the position that, in summary, this specific client’s relationship as a service provider (to a parent company), and without U.S.-held intellectual property, was not subject to Section 174 R&D capitalization. However, the client remained eligible to claim the R&D credit.
- FDII Deduction: Withum applied the Foreign-Derived Intangible Income (FDII) deduction, successfully lowering the client’s effective tax rate from 21% to 13-14%.
- Expanded Services: During initial consultations, Withum identified additional Client needs and offered accounting services to support broader financial operations.
- Ongoing Support: Regular communication was maintained to ensure continued alignment and proactive guidance.
The Results, ROI
Withum’s comprehensive review and strategic tax guidance led to significant financial and operational benefits for the client, including the following:
- Ongoing Value: The corrections made continue to benefit the Client in current and future tax years, streamlining future filings.
- Significant Financial Benefit: The Client received approximately $160,000 in tax refunds and preserved $561,000 in R&D credits for future use, totaling approximately $720,000 in benefits.
- Lower Effective Tax Rate: Implementation of the FDII deduction reduced the client’s effective tax rate to 13-14%, allowing the Client to preserve that cash for reinvestment in R&D and operations.
- Corrected Tax Treatment: Withum ensured the Client was not subject to unnecessary R&D capitalization and could claim the R&D credit appropriately.
- Improved Client Service: Withum provided responsive support, regular meetings, and tailored deliverables, including the executive summary for the Client’s leadership team.