Form 8820: Orphan Drug Credit

The Orphan Drug Credit is a tax incentive offered by the Internal Revenue Service (IRS) in the United States to companies that invest in developing drugs for rare diseases. Form 8820 is used to calculate and claim this credit.

What is the Orphan Drug Credit?

A tax credit worth 50% of qualified clinical testing expenses incurred during the tax year for developing a drug for a rare disease. Designed to encourage research and development of treatments for diseases affecting a limited population.

Who Should File Form 8820?

  1. Businesses that incurred qualified clinical testing expenses for orphan drugs during the tax year.
  2. This includes companies directly involved in developing the drug, as well as those that contract with them for clinical trials.
  3. Individuals who are not involved in a business and whose only source of the Orphan Drug Credit comes from pass-through entities (partnerships, S corporations, estates, or trusts) typically do not need to file Form 8820. They can report the credit directly on Form 3800.

What are Qualified Clinical Testing Expenses?

Expenses directly related to human clinical testing of an orphan drug. Examples include:

  • Costs of manufacturing the drug for clinical trials.
  • Fees paid to clinical research organizations (CROs) for conducting trials.
  • Salaries and benefits of employees involved in clinical testing.

How to Use Form 8820?

Use Form 8820 to calculate the credit amount and attach it to your tax return. The form has two parts:

  1. Part I: To figure the credit from your own trade or business.
  2. Part II (Optional): To provide details for each orphan drug with qualified clinical testing expenses.

Note: Taxpayers who only receive orphan drug credit allocations from pass-through entities may not need to file Form 8820 and can report the credit directly on Form 3800.

Reduced Orphan Drug Credit

  • Businesses can elect to claim a reduced credit of 25% instead of the standard 50%.
  • This election allows for a longer credit recapture period (explained in the FAQs).
  • To elect the reduced credit, complete Form 8820 and clearly indicate your intent on the original tax return (including extensions).

What is an orphan drug?

An orphan drug is a medication designated by the Food and Drug Administration (FDA) for treating a rare disease affecting fewer than 200,000 people in the United States.

Are there any limitations on claiming the Orphan Drug Credit?

Yes. The credit applies only to qualified clinical testing expenses paid or incurred during the tax year. Additionally, there may be recapture provisions if the drug doesn't receive FDA approval or is not marketed for a rare disease.

How long can I claim the Orphan Drug Credit?

The standard credit recapture period is for the year the drug receives FDA approval and the following two years. By electing the reduced credit (25%), the recapture period extends to the year the drug receives FDA approval and the following four years.