Newburg | CPA News Brief

By David R. Natan, CPA, MST, CVA

March 3, 2023

While capital raise may be at top of mind when immersing yourself into your newly planned biotech start-up, do not lose sight of some of these important accounting and tax considerations:

Spend Time to Understand and Properly Evaluate Your Choice of Entity Options

Work closely with your tax and legal advisors to understand the nuances between C Corporations, LLCs taxed as partnership, and S Corporations. Are you looking for LLC partnership pass-through losses for tax benefits at the individual level? Do you prefer the administrative simplicity of a C Corporation? Are investors seeking potential gain exclusion under Section 1202? Are there early-stage profits whereby an S Corporation might make sense? Do you plan to IPO in the future? Can you start as one entity and convert to another down the road if it makes sense? While there is no “one size fits all” option here, start-up biotech owners need to review their options and prioritize what is most important to them. We often recommend putting together a high-level pros and cons analysis so that you can compare the nuances from start-up through ultimate succession.

Proper Cash Flow Management is Essential

Your soon to be newly funded biopharma firm needs a well thought out financial plan that works through best and worst-case scenarios. Thinking through key metrics and tools such as burn rate, working capital, and ongoing variance analysis is very important to the various stages of capital raise you will encounter during your biotech life cycle. We recommend putting together multiple forecast scenarios and tracking these variances closely on at least a quarterly basis. Have you properly accounted for potential future acquisitions within your modeling; are hiring and key inflation metrics integrated? Have you properly integrated your sources of capital raise such as convertible notes, private placement debt, SAFE notes, term loan debt, and core equity financing? One significant area often overlooked is the lack of integration of cash flow planning around incentivizing key management. How will you gear your key management incentives, whether it be through such items as a formal stock option arrangement, profits interest, or phantom equity pool?

Solidify Your Internal Accounting Early in the Process

Developing your internal accounting procedures and formulating an internal accounting manual earlier in the process will help your biotech’s success for the future. Understanding that not every start-up biotech will have the luxury of developing a full internal accounting team, you still need to think through how to best mitigate risk and fraud. What accounting software best fits your needs? Tracking project costs and your R&D will be essential. We find that many biotech start-ups will want to begin cost effectively by utilizing the easy integration benefits of QuickBooks and layering on other control protections such as or Stampli. Many biopharma start-ups will also blend an internal person for data entry while utilizing an outsourced solution to close their monthly financials. Having a well-planned accounting system during the start-up phase of your biotech will help strengthen your relationship with investors and provide them timely financial information that will be helpful for future funding rounds and interested participation.

Navigating Research and Development Costs

Historically biotech and life science companies have received dramatic tax benefits afforded by the government’s emphasis on the importance of innovation and advancement. The Research and Development (R&D) tax credit has various applications and elections at both the Federal and State levels. The credit can also allow for start-ups to reduce their payroll tax burden to help with early-stage cash flow. One significant (and surprising) change, however, occurred in January 2023 when Congress did not act on delaying or retracting the requirement under the PATH Act for capitalization and amortization of R&D expenditures. While the R&D tax credit in of itself remains the same, biotech companies may receive a bit of a surprise when having to reclassify deductible research and experimentation costs and slowly amortize them over five years (15 years if derived outside the US). This could create unforeseen taxable income situations for those companies with revenue and earnings. While there is speculation that this still may be overturned, start-up biotech companies need to plan and integrate accordingly. Regardless of the curveball encountered here, it is very important for start-up biotech companies to have a good system of tracking R&D by qualified project. IRS and State agencies require maintaining and tracking your employees and subcontractors time by qualified R&D project to obtain the credit. While the details behind the R&D credit calculation are beyond the scope of this article, it is important for biotech entrepreneurs to ensure they have a good understanding of what qualifies and how best to track internally.

Newburg CPA, a mid-size accounting firm located just outside Boston, Massachusetts has many years of specialized biotech and life science experience. We work with biotech and life science companies of all sizes helping them navigate tax and accounting complexities from start-up through succession.

Interested in learning more about our services pertaining to biotech companies? Contact Newburg CPA today for a complimentary initial biopharma consultation today.

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