Printable Form 2026

IRS Form 8820 – Orphan Drug Credit

IRS Form 8820 – Orphan Drug Credit – The IRS Form 8820, officially titled Orphan Drug Credit, helps eligible taxpayers claim a valuable tax incentive for developing treatments for rare diseases. Pharmaceutical companies, biotech firms, and other entities investing in orphan drug research can significantly reduce their tax liability through this credit.

This comprehensive guide covers everything you need to know about Form 8820, including eligibility, qualified expenses, step-by-step filing instructions, recent law changes, and how to download the official PDF. All details come directly from the current IRS Form 8820 (Rev. September 2018) and official IRS.gov resources, with no recent developments noted as of February 2026.

What Is the Orphan Drug Credit and IRS Form 8820?

The Orphan Drug Credit, under Internal Revenue Code (IRC) Section 45C, equals 25% of qualified clinical testing expenses for drugs designated to treat rare diseases or conditions. Taxpayers use Form 8820 to calculate and claim this credit, or to elect the reduced credit under Section 280C.

The credit forms part of the General Business Credit (reported on Form 3800). It encourages innovation in treatments for conditions affecting small patient populations in the U.S.

Key fact: For tax years beginning after 2017, the Tax Cuts and Jobs Act (TCJA) reduced the credit rate from 50% to 25%. The form has remained current since its September 2018 revision.

Who Qualifies for the Orphan Drug Credit?

You must file Form 8820 if you claim the credit directly. Exceptions apply for certain pass-through entities.

Eligible filers include:

  • Individuals, corporations, estates, or trusts claiming the credit on their own qualified expenses.
  • Partnerships and S corporations (they complete the form and allocate the credit to partners/shareholders via Schedule K-1).
  • Estates and trusts that allocate the credit to beneficiaries.

Note: Taxpayers receiving the credit only through pass-through entities (partnerships, S corps, estates, or trusts) do not need to file Form 8820. They report it directly on Form 3800.

Controlled groups or businesses under common control treat all members as a single taxpayer and allocate the credit proportionately (attach a supporting statement).

What Are Qualified Clinical Testing Expenses?

Qualified clinical testing expenses include amounts that would qualify as research expenses under Section 41, with key modifications:

  • Substitute “clinical testing” for “qualified research” in relevant sections.
  • Treat 100% of contract research expenses as qualified (instead of 65% or 75%).

Clinical testing must meet all four conditions:

  1. Conducted under an FDA exemption for a drug treating a rare disease or condition (Section 505(i) of the Federal Food, Drug, and Cosmetic Act).
  2. Occurs after FDA orphan drug designation (Act Section 526) and before FDA approval (Act Section 505(b) or biologics licensing under Public Health Service Act Section 351).
  3. Performed by or for the taxpayer holding the designation.
  4. Relates directly to the designated rare disease or condition.

Rare disease or condition definition (determined as of the FDA designation date):

  • Affects 200,000 or fewer persons in the United States, or
  • Affects more than 200,000 persons, but no reasonable expectation exists that U.S. sales will recover development and availability costs.

Exclusions:

  • Expenses funded by grants, contracts, or other persons/government entities.
  • Testing outside the U.S. (unless insufficient U.S. patient population and conducted by a U.S. person or unrelated party).
  • Testing by Section 936 corporations.

Important coordination rule: You cannot use the same expenses for both the Orphan Drug Credit and the Research Credit (Form 6765). However, qualifying expenses still count toward the research credit base for future years.

How to Calculate the Orphan Drug Credit on Form 8820?

Part I – Current Year Credit (main calculation):

  • Line 1: Total qualified clinical testing expenses for the tax year (attach Part II details for each drug).
  • Line 2a: Multiply Line 1 by 25% (0.25). If electing the reduced credit under Section 280C, multiply by 19.75% (0.1975) instead.
  • Line 2b: Subtract any overlapping employer differential wage credit (from Form 8932) attributable to the same wages.
  • Line 2c: Line 2a minus Line 2b.
  • Line 3: Pass-through credits from partnerships, S corporations, estates, or trusts.
  • Line 4: Add Lines 2c and 3 (this is your total current-year credit).
  • Estates/trusts: Allocate between entity and beneficiaries on Lines 5–6.

Part II – Orphan Drug Information (attach additional sheets as needed): For each drug, provide:

  • Generic name of the orphan drug.
  • FDA Designation Application number.
  • Date of designation under Section 526 of the FD&C Act.

Section 280C Election:

  • Electing the reduced credit (19.75%) allows you to avoid reducing your deduction for the expenses.
  • The election must be made on your original timely filed return (including extensions) and is irrevocable for that year.
  • Without the election, reduce your deduction (or capitalized expenses) by the full credit amount and attach a statement detailing the reductions.

Step-by-Step Guide to Filing IRS Form 8820

  1. Gather documentation: FDA designation letters, expense records, and clinical testing details.
  2. Complete Part II for every qualifying orphan drug.
  3. Calculate qualified expenses on Line 1.
  4. Decide on the Section 280C reduced credit election and complete Line 2.
  5. Add pass-through credits if applicable.
  6. Attach Form 8820 to your income tax return (e.g., Form 1040, 1120, 1065, 1120-S, or 1041).
  7. Report the final credit on Form 3800, Part III, line 1h.
  8. Keep records for at least as long as they may affect your tax liability.

Deadlines: File with your timely tax return (including extensions). Carryforwards or carrybacks follow General Business Credit rules on Form 3800.

Benefits of the Orphan Drug Credit

This credit lowers the after-tax cost of clinical trials for rare disease treatments, incentivizing development of drugs that might otherwise lack commercial viability. It pairs well with other incentives like FDA Orphan Drug Designation (which provides market exclusivity, fee waivers, and grants).

Pharmaceutical and biotech companies routinely use this credit alongside the Research Credit, but careful tracking prevents double-claiming expenses.

Common Questions About Form 8820 (FAQs)

  • Can I claim the credit for post-approval testing?
    No—testing must occur before FDA approval/licensing.
  • Is the credit refundable?
    No, it is a nonrefundable general business credit, subject to tax liability limitations (with carryforward/carryback options).
  • Where do I find the latest Form 8820?
    Download the official PDF directly from the IRS: https://www.irs.gov/pub/irs-pdf/f8820.pdf.
  • Has the form or credit changed since 2018?
    No—the IRS lists no recent developments. The 25% rate (or 19.75% reduced) remains in effect.
  • Do I need separate instructions?
    No—the Form 8820 PDF (Rev. September 2018) includes complete instructions on the form itself.

Final Tips for Success

  • Maintain detailed records of FDA designations and expense allocations.
  • Consult a tax professional experienced in life sciences R&D credits for complex situations (e.g., controlled groups or international testing).
  • Review coordination with the Research Credit (Form 6765) to maximize total benefits without overlap violations.

The Orphan Drug Credit via IRS Form 8820 remains one of the most powerful incentives for advancing treatments for rare diseases. Claiming it correctly can deliver substantial tax savings while supporting critical medical innovation.

For the most accurate and up-to-date guidance, always refer to the official IRS Form 8820 PDF and consult IRS.gov or a qualified tax advisor. Tax laws can be complex—professional advice ensures full compliance and maximum benefit.