Are you developing health care IT software? New regulatory changes may spell credit opportunities. We discuss areas to focus on and case studies here. Get the full report - http://gt-us.co/1IjRdgB

1. Health care IT:
Regulatory changes may mean
R&D tax credit opportunities
Regulatory changes can translate to real tax savings for those developing
health care IT software. While many companies take advantage of the R&D
tax credit when developing or implementing new IT products/solutions,
many health care leaders aren’t aware of newly defined qualified development
activities that could significantly increase R&D tax credits. As a result,
reviewing new or improved R&D projects may lead to tremendous savings
opportunities for health care IT organizations.

2. 2
Health care IT: Regulatory changes may mean RD tax credit opportunities
Reviewing new or improved RD projects may
lead to tremendous savings opportunities for
health care IT organizations.
Areas of focus for 2015
The pace of change for health care IT is accelerating
due to frequently updated laws like the Affordable
Care Act (ACA), HIPAA, and the American
Recovery and Reinvestment Act (ARRA). New or
updated regulations often result in the need for new
data and new personnel, which in turn may affect
RD tax credits. Two regulatory developments that
may significantly affect health care IT and the related
RD tax credits this year are:
• Meaningful Use 2 (MU2). Medicare and Medicaid
Electronic Health Record (EHR) Incentive
Programs are designed to spur the “meaningful
use” of certified EHR technology that stores data
in a structured format. Providers now must show
that they are using their EHRs in a meaningful
way by meeting thresholds for a number of
objectives. Commonly referred to as Meaningful
Use 2 (MU2), health care IT companies are
required to develop new electronic reporting
tools and also spend a significant amount of time
designing and developing new EHR software
processes. There will likely be significant RD tax
credit opportunities for compliance.
• ICD-10. Health care providers also face the
daunting task of implementing the 10th version
of the International Statistical Classification of
Diseases and Related Health Problems (ICD-10)
classification system in 2015. ICD-10 increases
the number of classification codes by nearly
20 times and is the first major overhaul for the
U.S. since the adoption of ICD-9 in 1979. These
classification codes are pervasive throughout EHR
software and might in and of themselves require an
overhaul in the way the software gathers, uses and
communicates the codes.
There may be many more areas of focus as the
year goes by, and health care IT companies must
continue to monitor new or updated regulations as
they emerge and assess them for additional RD tax
credit eligibility.
A re-energized RD tax credit
In the past, health care providers invested in new
systems less frequently, and used the RD tax
credit mostly on those occasions. Given the velocity
of change in the industry (currently due to MU2
and ICD-10), RD tax credit opportunities have
proliferated. Today, activities by a broad range of
employees potentially qualify — not just computer
science engineers and developers writing code, but
also individuals directly supporting or supervising
them. Significant amounts of time are spent by
these individuals performing tasks such as gathering
requirements from providers, performing beta
and sandbox testing, and translating regulatory
requirements into actionable tasks for the engineering
group. All of these activities have the potential to drive
significant increases in the amount of a company’s
RD tax credit.

3. 3
Health care IT: Regulatory changes may mean RD tax credit opportunities
ALMOST $200,000 IN SAVINGS FOR
A LARGE HEALTH CARE PROVIDER
To deal with increased regulations, an established U.S.
health care provider increased its qualified hours by
15% throughout the company, with the most notable
increases seen in the RD product development group,
quality assurance, the software testing groups, and the
user interface product development groups. Most of
this growth was attributed to MU2 and ICD-10. Grant
Thornton professionals were engaged to evaluate the
organization’s RD tax credits, performing a thorough
review of health care IT costs, processes and personnel.
Because of the swift pace of regulatory change, our team
took a fresh look at everyone’s job and tasks, even if they
weren’t covered in a previous year. Because of regulatory
changes and the additional people required to meet
them, our review helped the company achieve savings
of almost $200,000 in the RD tax credit amount (after
280C) and identified an additional $2 million in wage
QREs. The company now feels confident that it is taking
advantage of the available credits and is continuing
to look to Grant Thornton to stay on top of evolving
regulations and bring the right solutions.
CASE STUDY
Finding savings for your company
The majority of companies in the U.S. are taking the
RD credit — and the numbers are only growing.
Other issues may have taken precedence in the past
few years, but now is the time to focus on the RD
tax credit. Some potential benefits include:
• Reduced effective tax rates (federal and state, if
applicable)
• Increased earnings per share
• Increased cash flows
• The ability to fund future or additional research
activities
Here’s how to start:
1. Identify qualified research activities. Congress
has enacted a fairly broad definition, but it is
important to fully understand the complexities for
best results. The first step is to determine which
aspects of your company’s operations meet the
qualification tests. Taxpayers can take current-
year tax credits and amend any open prior year
returns (typically the past three years) to claim
missed credits. Unused credits have a 20-year
carryforward if not available for current use or
prior years.
2. Gather and categorize qualified research
expenditures. Segment your expenses across three
main categories:
–– Wages. Taxable wages for employees with
direct involvement, direct supervision and
direct support of RD activities.
–– Supplies. Qualified supply expenses include
tangible supplies used in RD activity.
Depreciable assets are not qualified supplies.
–– Contract research. Amounts paid to
third parties for direct involvement, direct
supervision or direct support of RD activities
are qualified and included in the RD credit at
65% of eligible expenditures.

4. Health care IT: Regulatory changes may mean RD tax credit opportunities
Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information about the issues
discussed, consult a Grant Thornton LLP client service partner or another qualified professional.
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© 2015 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd
Connect with us
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Contact
Rob Levin
Managing Director
Strategic Federal Tax Services
T +1 404 475 0190
E rob.levin@us.gt.com
The author would like to
acknowledge the contributions
of Max Coursey to the research
underlying this article.
Moving forward
In this constantly evolving regulatory environment,
companies that develop health care IT software must
stay on their toes to keep up. For example, the RD
tax credit was used mainly for core IT personnel and
activities in the past — this is no longer true, and
determining the tax credit now also involves looking
at many people (and their tasks) that support the core
IT team or are supervised by that team. In addition,
to comply with new regulations such as MU2 and
ICD-10, companies need to build in a process to
monitor evolving regulations and make swift changes
when necessary. Because of the swift regulatory pace,
you may qualify for more RD tax credits than you
realize, with more coming. Now is the time to jump in
— there may be money on the table for you.
Medicare and Medicaid
EHR Incentive Programs
EHR allows health care providers to record patient
information electronically instead of using paper
records. However, EHRs are often capable of doing
much more than just recording information. The EHR
Incentive Program asks providers to use the capabilities
of their EHRs to achieve benchmarks that can lead
to improved patient care. According to the Centers
for Medicare Medicaid Services (CMS), “structured
data allows patient information to be easily retrieved
and transferred, and it allows the provider to use the
EHR in ways that can aid patient care. Certified EHR
technology … helps providers and patients be confident
that the electronic health IT products and systems they
use are secure, can maintain data confidentially and
can work with other systems to share information.”1
The EHR programs are being rolled out in three stages,
each with increasing requirements that health care
providers must meet to receive incentive payments:
• Stage 1. In their first year of participation, providers
can adopt, implement, upgrade to, or demonstrate
meaningful use of certified EHR technology. Health
care professionals and/or hospitals and critical
access hospitals must meet lists of required core
objectives and then choose additional objectives
from a menu to show they are in compliance with
Stage 1.
• Stage 2. MU2 is implemented in Stage 2, requiring
the development of new electronic reporting tools
and new EHR software processes.
• Stage 3. CMS is currently developing Stage 3
objectives.
1
For more information, see the Centers for Medicare Medicaid Services website at www.cms.gov for details.