Compounding R&D Tax Credits

Innovate your pharmaceutical compounding and custom‑manufacturing operations. Compounding pharmacies, cGMP custom dose‑manufacturers and service labs across the U.S. are routinely creating novel formulations, custom delivery systems, sterile processes, stability workflows and bespoke dosage protocols. Many of these activities satisfy the criteria for the federal R&D Tax Credit under IRC §41 (and often are eligible for state credits as well).

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Examples of qualifying activities in compounding operations

Formulation Development & Custom Delivery Creating unique compounded dosage forms (e.g., high‑viscosity topical gels, extended‑release multi‑dose units, nanoparticle suspensions, personalised blends) and testing delivery systems, dosing accuracy, compatibility.
Stability & Compatibility Testing Conducting accelerated stability or real‑time stability of custom formulations, excipient screening, compatibility of APIs with novel containers or co‑dose systems, shelf‑life and impurity profiling via pilot studies.
Analytical Method Development Designing or refining analytical assays to confirm potency, sterility, impurity profiles, bioavailability for custom compounds or unique delivery systems, side‑by‑side method validation.
Process Innovation & Automation Developing automated blending/dispensing systems adapted for custom formulations, quick‑change tooling for niche batches, tracking trial yields, prototype machine/process testing of new compounding lines.
Custom Patient‑Specific Manufacture & Workflow Design Testing patient‑specific dosage workflows, integration of sensors or monitoring in multi‑dose units, adapting packaging or delivery systems for compounded products (e.g., sensor‑enabled injectables, discrete dosing cartridges).

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What qualifies as R&D in Compounding?

To qualify, your compounding or custom‑manufacturing activities must:

Aim at a permitted purpose — such as a new or improved compounded formulation, innovative delivery or dosing system, custom patient‑specific dosage protocol, stability/compatibility study or advanced manufacturing process.
Tackle technical uncertainty — for example: “Can this tailored dosage form maintain potency over the required shelf life?”, “Will the new pump/dispense system reliably deliver high‑viscosity formulation?”, “Can a multi‑dose, sensor‑enabled formulation reliably deliver medication under varied conditions?”
Use a process of experimentation — formulation trials, stability studies, compatibility testing, side‑by‑side comparators of excipient systems, pilot manufacturing runs, dispense‑system benchmarking.
Be technological in nature, grounded in pharmaceutical science, compounding engineering, materials science, process engineering, analytical chemistry or instrumentation/automation engineering.

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Qualified Research Expenses (QREs)

Expense Type

Examples in Compounding

Eligibility Notes

Wages

Formulation scientists, analytical chemists, process engineers, compounding pharmacists, QA/R&D support staff

Personnel directly engaged in qualified research activities

Supplies

APIs, trial excipients, stability‑study vials/tubes, dispensation system prototypes, formulation kits

Materials consumed in experimentation or pilot production

Software / Cloud

Formulation‑design modelling software, stability‑study databases, analytics for dispense‑system performance

Eligible when used for the research

Contract Research

External labs, packaging/delivery‑system vendors, automation/dispense‑tooling consultants

Subcontracted work generally up to the applicable fraction that qualifies

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Roles commonly involved in qualifying activities

Formulation Scientists, Compounding Pharmacists, Pharmaceutical Engineers
Analytical Chemists, Stability/Compatibility Specialists, Lab Technicians
Process Engineers, Automation Engineers for dispensing/packaging systems
QA/QC Engineers engaged in method validation or monitoring workflows
Project Managers overseeing custom‑dose workflows, pilot runs and delivery systems

What does not qualify

Routine compounding of existing formulations under standard recipes without experimentation or improvement
Standard dispensing or manufacturing services without documented research or uncertainty
Purely administrative tasks, sales or marketing operations
Purchase of standard equipment or facility expansion not tied to a documented research or trial process

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Compliance and Documentation

§174 Update

Following the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, §174 now allows immediate expensing of domestic research expenses for tax years beginning on or after January 1, 2025. Taxpayers may also elect optional amortization under new §174A. Foreign research expenses must still be amortized over 15 years. This is separate from the §41 credit but impacts overall tax planning.

Strong documentation is essential. Key records should include:

Project briefs outlining objectives (e.g., reduce delivery‑system error by X%, extend shelf life by Y%), formulation trial logs, stability/compatibility trial logs.
Side‑by‑side comparator logs of alternative excipient systems, dispense system prototype logs, yield/scrap data for pilot runs.
Analytical method development logs, test/assay version histories, validation reports.
Employee time‑tracking tied to research projects, payroll records of R&D staff, supply‑usage logs tied to experimentation.
Version histories of formulation iterations, “failed” trial logs, acceptance‑criteria change logs — these all help demonstrate the process of experimentation.

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Frequently Asked Questions

Do compounding pharmacies or custom‑manufacturers qualify for the R&D Tax Credit?

Yes — if they are performing new formulation development, custom delivery system design, stability or compatibility testing, automation or dispense‑system innovation, rather than simply routine compounding/batch runs.

What types of expenses can be claimed?

Wages of scientists, engineers and qualified staff involved in research; materials and supplies consumed in trial/experiment; software or cloud tools used for modelling or analytics; third‑party vendor/lab costs for stability, compatibility or prototype testing.

Which activities do not qualify?

Standard compounding operations without innovation or documented experimentation; routine dispensing/manufacturing; general business operations like marketing, sales, administrative or dispatch functions.

How should a compounding operation document its research?

Maintain detailed logs of formulation development steps, stability/compatibility testing, dispense‑system trials, prototypes, side‑by‑side comparisons, employee time by project, supply usage tied to experiments, iteration logs including unsuccessful batches/trials.