The Orphan Drug Act was passed in 1983 under IRC Section 45C to incentivize pharmaceutical companies to develop treatments for rare diseases, defined as conditions affecting fewer than 200,000 people in the United States. Once a company receives orphan drug designation from the FDA, the Orphan Drug Tax Credit (ODTC) allows companies to claim 100% of qualified clinical testing expenses (QCTEs, employee wages, raw materials & supplies, and third-party contracting costs) involved in clinical trials between the time of designation and FDA approval.
Companies can recoup a federal tax credit equal to approximately 25% of the total R&D QCTEs per year. For additional information regarding the ODTC and the associated tax benefits, see our detailed article. The ODTC applies to clinical testing expenses only; the R&D costs associated with discovery and preclinical phases should be claimed with the standard R&D Tax Credit.
Example activities that qualify:
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Benefits for the R&D Tax Credit vary from state to state. Get an accurate estimate of what your potential state tax credit!