Our Experience Supporting a Pharma Company as It Built Its Foundations
Early-stage pharmaceutical companies are usually built around a scientific mission. Founders focus on drug development, clinical pathways, intellectual property, fundraising, and the patients they ultimately hope to serve.
Accounting and tax compliance rarely receive the same attention at the beginning. But as a pharmaceutical company raises outside capital, hires employees, engages research partners, and expands into new states, its financial infrastructure becomes increasingly important. It quickly becomes part of the foundation supporting that mission.
Our firm recently worked with an early-stage pharmaceutical company facing this transition. We omitted identifying and confidential details. However, the experience illustrates how specialized life sciences accounting can help a company move beyond founder-managed records. It can support GAAP-compliant financial reporting, stronger tax compliance, and greater financing readiness.
Reconstructing the company’s financial history
Our first priority was understanding what had already happened.
Like many early-stage companies, its initial transactions included expenses paid personally by the founder and investments received through SAFEs. They also included intellectual property contributed to the business and payments to laboratories, research vendors, and consultants. Some transactions appeared in QuickBooks, while supporting information was spread across agreements, bank statements, capitalization records, spreadsheets, and emails.
Before the company could prepare reliable financial statements or corporate tax returns, it needed accurate books.
Our accounting team reviewed the company’s SAFE agreements, founder-related transactions, intellectual property documents, and bank and credit card activity. We also reviewed other supporting records. We reconciled the accounts, corrected transaction classifications, and produced financial statements for management’s review.
This historical cleanup was not simply about organizing QuickBooks. It established a dependable financial starting point. It also created books capable of supporting GAAP-compliant financial reporting.
Translating pharmaceutical research into accounting records
One of the most important aspects of pharmaceutical accounting is understanding the business purpose behind each transaction.
A payment to a consultant might represent general business advice, scientific research, clinical support, or patent-related work. A laboratory invoice could relate to testing, product development, or another stage of the company’s research program. These distinctions affect the financial statements and may also influence the company’s tax treatment.
Our team worked with management to distinguish R&D subcontractors from general professional service providers. We also identified expenses related to product development, research studies, laboratories, and intellectual property.
This required more than applying a generic bookkeeping rule. The accounting team needed to understand how the company’s scientific activities translated into GAAP accounting and federal tax reporting.
Navigating Section 174 and the R&D tax credit
Research-intensive companies must also address the tax treatment of their R&D expenditures.
We helped the company evaluate its research costs under Internal Revenue Code Section 174. We discussed how its product-development activities addressed technical uncertainties. We also helped management organize research expenditures through a structured Section 174 process.
Section 174 can significantly affect an early-stage pharmaceutical company. Qualifying research expenditures may be capitalized and amortized rather than immediately deducted, depending on the applicable rules for the tax year.
We also evaluated the company’s potential eligibility for the Section 41 R&D tax credit. Although Section 174 and the R&D tax credit both relate to research activity, they serve different purposes. They also require separate analyses. Establishing clear R&D accounts and maintaining supporting documentation can make both processes more manageable.
Life sciences companies may have substantial research spending and limited commercial revenue. For these companies, understanding the interaction between Section 174, the R&D tax credit, taxable losses, and future tax attributes is an important part of tax planning.
Building a repeatable financial close
Once we addressed the historical records, the focus shifted toward ongoing accounting and financial reporting.
We established a recurring process for reconciling bank and credit card accounts and reviewing transaction classifications. The process also included collecting invoices and contracts and following up on material or unusual activity. We helped management resolve QuickBooks access issues and implement controls around changes to previously completed accounting periods.
As the company continued raising capital, we reconciled investment proceeds in its bank accounts with SAFE balances in its capitalization records. This helped identify discrepancies that required further investigation before they created larger financial reporting problems.
The objective was not to build a finance department designed for a much larger organization. Instead, we introduced an appropriate level of structure for the company’s stage. We also created a close process that could scale as transaction volume and reporting requirements increased.
Supporting multistate and payroll tax compliance
Growth also introduced new compliance responsibilities.
Changes in employee locations and payroll providers raised questions about state registrations, payroll tax filings, withholding accounts, and unemployment insurance. They also created questions around employment-related notices. Our team reviewed the issues, identified missing or potentially duplicative filings, and coordinated with payroll providers and outside registration specialists.
We also supported federal and state corporate tax filings, Delaware annual compliance, year-end information reporting, and proactive tax planning.
For an early-stage company, these responsibilities can easily become fragmented across payroll, accounting, banking, tax, and legal platforms. An outsourced accounting firm can help connect those systems. It can also provide management with a more complete view of the company’s compliance position.
Preparing GAAP financials for financing
Reliable financial records became especially important when the company entered fundraising and financing discussions.
Our team helped provide historical financial statements and respond to accounting questions. We also reviewed significant liabilities and supported information requests from financing parties. In addition, we discussed how investor information rights could create new monthly or quarterly financial reporting requirements.
This is where GAAP-compliant accounting begins producing visible business outcomes. The work is no longer only about completing a corporate tax return. It helps management respond confidently to investors, lenders, and other stakeholders. The company does not have to reconstruct its financial history every time a request arrives.
The experience reinforced a lesson we see across early-stage pharmaceutical and life sciences companies: financial infrastructure should develop alongside the science.
A company may not need a large internal finance department from day one. It does, however, need accurate books and GAAP-compliant financial reporting. It also needs thoughtful R&D cost classification, Section 174 analysis, R&D tax credit planning, and a repeatable financial close.
When companies establish those foundations early, founders can spend less time untangling the past. They can spend more time advancing the drug development work the company was created to pursue.
If your pharmaceutical or life sciences company is building out its accounting, tax, or financial reporting processes, we can help. Reach out to our team to schedule a call and discuss the financial infrastructure your company needs to support its next stage of growth.
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The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.
