Pharmaceutical Development / Reformulation R&D Tax Credits

Push the boundaries of pharmaceutical innovation through new formulations, reformulations, improved dosage forms and process redesigns. Pharmaceutical developers across the U.S. undertake molecule optimisation, delivery system upgrades, manufacturing scale‑up and stability enhancements. Many of these initiatives meet the criteria for the federal R&D Tax Credit under IRC §41, with additional state‑level opportunities.

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Examples of qualifying activities in pharmaceutical development/reformulation

New dosage form development Converting immediate‑release to extended‑release, transdermal patches, inhalable particle systems, nanoparticle suspensions, or novel delivery vehicles.
Reformulation of existing drugs Enhancing stability, modifying excipient systems, reducing impurities, increasing shelf life, improving bioavailability or tolerability.
Manufacturing process optimisation Pilot runs of new granulation/coating/tableting technologies, scale‑down modelling, yield improvement and defect reduction trials.
Analytical method development for reformulated products Creating or validating assays for release, dissolution, impurity profiling, side‑by‑side comparator studies.
Compatibility/container closure & packaging redesign Novel container/closure systems to support shelf‑life enhancement or delivery systems for reformulated products.

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What qualifies as R&D in pharmaceutical development or reformulation?

To qualify, your drug‑development or reformulation activities must:

Aim at a permitted purpose — such as a new active pharmaceutical ingredient (API), improved dosage form (extended release, transdermal, inhalable), reformulation of an existing drug to enhance bioavailability or patient compliance, or improved manufacturing process.
Tackle technical uncertainty — for example: “Can the new extended‑release formulation maintain therapeutic levels while reducing side‑effects?”, “Will the reformulated version meet regulatory bioavailability thresholds?”, “Can the manufacturing scale‑up maintain impurity control while increasing throughput?”
Use a process of experimentation — formulation trials, side‑by‑side testing of release profiles, compatibility/stability studies, scale‑up manufacturing modelling, analytical method development.
Be technological in nature, grounded in medicinal chemistry, pharmaceutics, biopharmaceutics, materials science, process engineering or analytical chemistry.

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Qualified Research Expenses (QREs)

Expense Type

Examples in Pharma Development/Reformulation

Eligibility Notes

Wages

Formulation scientists, medicinal chemists, process/analytical engineers, manufacturing scientists

Staff engaged in research qualify

Supplies

Trial formulations, excipients, vials/tubes for stability studies, delivery‑system prototypes, consumables

Materials consumed in experimentation

Software / Cloud

Modelling software for dissolution/release, analytics tools, LIMS for method development

Eligible when used for qualified research

Contract Research

External labs for stability/impurity studies, packaging/delivery‑system vendors, pilot manufacturing vendors

Subcontracted research costs generally qualify

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Roles commonly involved in qualifying activities

Formulation scientists, medicinal chemists, pharmaceutical engineers
Analytical chemists, biopharmaceutics and method‑validation specialists
Process engineers, manufacturing scale‑up scientists
Quality/regulatory engineers for stability, compatibility and packaging systems
Project managers overseeing reformulation, manufacturing trials and validation workflows

What does not qualify

Routine manufacturing or reformulation under established recipes without method development or technical uncertainty
Standard production or packaging without experimentation or innovation
General management, sales, marketing or administrative tasks
Equipment or facility purchases not tied to a documented research or experimental 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.

Key documentation items:

Formulation trial logs, version histories of excipient/drug‑delivery changes, side‑by‑side release/dissolution/bioavailability test data
Pilot manufacturing run logs, scale‑up modelling reports, yield/scrap/defect comparison data
Analytical method development logs, stability/impurity/compatibility study records, container/closure trial logs
Employee time tracking tied to research projects, supply/consumable usage logs, iteration history including unsuccessful trials Such records help support the four‑part test and ensure preparedness for audit evaluation.

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Frequently Asked Questions

Do pharmaceutical developers engaged in reformulation or manufacturing improvement qualify for the R&D Tax Credit?

Yes — when they perform new dosage form development, reformulation with method development, manufacturing scale‑up trials, analytical validation or packaging/delivery system redesign rather than routine production.

What expenses can be claimed?

Wages of scientists, engineers and technologists engaged in R&D; trial formulation/consumable supplies; software or analytics tools; external lab or vendor contracts for stability/method/packaging trials.

Which activities do not qualify?

Routine manufacturing under established formulations, standard market delivery without objective improvement, business operations without experimentation.

How should development teams document research?

Maintain logs of formulation iterations and tests, manufacturing/scale‑up trial data, analytical validation records, employee time by project, supply usage linked to R&D tasks.