The Strategic Integration of M.G.L. c. 63, § 38W: Navigating the Massachusetts Life Sciences Research Credit and R&D Incentives

Massachusetts General Laws Chapter 63, Section 38W provides a corporate excise tax credit equal to 10 percent of qualified research expenses for certified life sciences companies, specifically incentivizing legally mandated clinical trial expenditures incurred both inside and outside the Commonwealth. This targeted incentive complements the standard Section 38M research credit by addressing the global geographic requirements of drug and medical device development while offering a 15-year carryforward for unused credit amounts.

The enactment of Section 38W represents a pivotal component of the Massachusetts Life Sciences Act, a legislation designed to fortify the state’s position as a global epicenter for biotechnological innovation and commercialization.1 While many jurisdictions offer generic research and development (R&D) incentives, the Massachusetts framework is uniquely calibrated to the high-stakes, capital-intensive nature of the life sciences sector.3 By providing a dedicated avenue for clinical trial expenses that might otherwise fail the strict in-state geographic tests of traditional tax credits, the Commonwealth ensures that its resident firms can maintain their headquarters and intellectual core within the state even as they expand their clinical operations globally.5 This analysis explores the mechanical, regulatory, and strategic dimensions of Section 38W, contrasting it with the more generalized Section 38M credit and elucidating the administrative requirements established by the Massachusetts Department of Revenue (DOR) and the Massachusetts Life Sciences Center (MLSC).

Legislative Genesis and the Evolution of Life Sciences Incentives

The primary legal foundation for the current suite of life sciences incentives is “An Act Providing for the Investment in and Expansion of the Life Sciences Industry in the Commonwealth,” signed into law in June 2008.1 This act committed $1 billion over a decade to stimulate economic development through research, infrastructure, and workforce training.2 The initiative was not merely a fiscal expenditure but a strategic intervention meant to mitigate the risks inherent in the life sciences R&D cycle, which is often characterized by a “valley of death” between initial discovery and commercial viability.6

In June 2018, the state reaffirmed this commitment with Chapter 112 of the Acts of 2018, authorizing an additional $623 million in bond authorizations and tax credits over five years.3 The trajectory of this support reached a new milestone in November 2024, when Governor Maura Healey signed “An Act relative to strengthening Massachusetts’ economic leadership,” which launched a new 10-year, nearly $1 billion initiative.3 A key provision of this recent legislation was the increase of the annual cap for life sciences tax incentives from $30 million to $40 million, effective for taxable years beginning on or after January 1, 2024.8

The Mechanics of M.G.L. c. 63, § 38W

M.G.L. c. 63, § 38W is specifically tailored to the nuances of clinical testing.12 While Section 38M serves the broader manufacturing and technology sectors, Section 38W addresses the reality that pharmaceutical and medical device companies must conduct multi-phase trials that often require multi-site, multi-state, or even multi-national coordination to satisfy Food and Drug Administration (FDA) licensure requirements.5

Defining Qualified Research Expenses and Legally Mandated Trials

The statute adopts the definitions of “qualified research expenses,” “base amount,” and “basic research” from Section 41 of the Internal Revenue Code (IRC), but with a critical modification for certified life sciences companies.12 Under Section 38W(b), qualified research expenditures include those relating to “legally mandated clinical trial activities” performed both inside and outside the Commonwealth.5 This phrasing is a significant departure from the standard Massachusetts research credit, which strictly mandates that research activity must be conducted within the state to qualify.13

The term “legally mandated” typically refers to trials required as part of the regulatory approval process for a human drug or medical device.5 For many biotechnology firms, the bulk of their late-stage R&D costs are tied to Phase II and Phase III trials where geographic diversity is not just a preference but a regulatory necessity to ensure the safety and efficacy of a product across various demographics.5 Section 38W ensures these companies can claim a 10 percent credit on the excess of these expenses over their base amount, regardless of the physical location of the trial site.10

Calculation Methodology and the Fixed-Base Ratio

The calculation of the Section 38W credit is modeled on the federal research credit as it existed on August 12, 1991.13 Taxpayers must compute a fixed-base ratio, which is determined by dividing the aggregate qualified research expenses for the third and fourth taxable years preceding the credit year by the total gross receipts for those same two years.13 This ratio is capped at 16 percent.13

The “base amount” for the credit is calculated by multiplying this fixed-base ratio by the average annual receipts of the four preceding taxable years.13 However, a statutory floor exists: the base amount cannot be less than 50 percent of the qualified research expenses for the current year.13 This ensures that the credit remains focused on incremental growth in research spending rather than providing a windfall for stagnant R&D budgets.19

Comparative Analysis: Section 38W versus Section 38M

The strategic decision for a life sciences company often involves determining which R&D credit to utilize for specific expenditures. While Section 38M is the “standard” research credit, Section 38W offers specific advantages for clinical trial work, albeit with different monetization rules.5

The Geographic Pivot

The standard Section 38M credit is the workhorse of the Massachusetts innovation economy, but its “in-state” requirement creates a significant tax hurdle for life sciences companies that have successfully moved past the laboratory phase.14 If a company conducts a Phase III trial involving patient cohorts in Florida, Texas, and New York, the Section 38M credit provides zero benefit for those expenditures.13 By contrast, Section 38W allows these expenses to be included in the QRE pool.5 This allows the firm to maintain its centralized R&D headquarters in a high-cost environment like Cambridge or Worcester while remaining competitive on a global tax basis.5

Liquidity versus Longevity

A crucial distinction lies in the monetization of these credits. For early-stage, pre-revenue life sciences companies, the 90 percent refundability of the Section 38M credit is often more attractive than the Section 38W credit.21 Refundability provides immediate cash flow which is vital for extending the operational “runway” before a product launch.3 However, the MLSC awards these refunds on a discretionary basis, and they are subject to strict job creation targets.6

Section 38W, while non-refundable, provides a 15-year carryforward.5 For established pharmaceutical companies with significant current tax liabilities, Section 38W offers a way to reduce their immediate corporate excise burden while accounting for the expansive costs of global clinical operations.20 Furthermore, Section 38W allows for the exclusion of the IRC Section 280C(c) rule, meaning companies do not have to reduce their R&D expense deduction by the amount of the credit claimed, a notable departure from standard federal and state R&D tax treatment.12

Revenue Office Guidance: TIRs and Directives

The Massachusetts Department of Revenue (DOR) has issued several Technical Information Releases (TIRs) and directives that provide the necessary interpretive lens for applying Section 38W in practice.5

TIR 08-23: The Foundation of Life Sciences Incentives

TIR 08-23 serves as the primary guidance document for the implementation of the 2008 Life Sciences Act.10 It clarifies that the Section 38W credit is available only to the extent authorized by the MLSC pursuant to the Life Sciences Tax Incentive Program.10 The TIR explicitly notes that while the calculation methodology mirrors Section 38M, the inclusion of out-of-state clinical trial costs is the distinguishing regulatory feature.10

Crucially, TIR 08-23 specifies that the Section 38W credit can be used to reduce the corporate excise to the minimum tax floor of $456.10 Unlike the standard research credit (which was amended to include a refundable component for life sciences companies), Section 38W was designed from the outset as a carryforward-only credit.5 This structural choice reflects a policy desire to balance immediate liquidity for startups with long-term tax stability for mature enterprises.3

TIR 13-6: The Mechanics of Recapture

Because these credits are tied to specific economic performance commitments, the DOR issued TIR 13-6 to address the consequences of decertification.6 If a company fails to meet the hiring or retention targets specified in its MLSC agreement, its certification may be revoked.6

The recapture rules stipulated in TIR 13-6 are rigorous:

• Recapture Period: The value of any credits or benefits received is recaptured starting from the first day of the taxable year in which the material variance from the certification proposal commenced.6
• Reporting Requirements: The recaptured amount must be reported as additional tax due on the return for the year in which the MLSC makes the final determination of revocation.6
• Pro-rata Logic: For investment tax credits (ITC) and job-based credits, the recapture is typically pro-rated. For example, if a company received an ITC for property with a 10-year useful life but was only in compliance for two years before revocation, it must pay back 8/10 of the credit received.6

For Section 38W, recapture means that any credits used to offset liability in the non-compliant years become an immediate liability.3 This highlights the importance for tax managers to coordinate closely with HR and operations to ensure that the job creation targets—the “price” of the credit—are being met in real-time.20

The MLSC Certification Gateway

The prerequisite for claiming the Section 38W credit is certification by the Massachusetts Life Sciences Center.8 This is a discretionary process, and the MLSC evaluates applicants based on their potential to stimulate the state’s economy.6

Eligibility Requirements for 2024-2025 Cycles

To be eligible for the Life Sciences Tax Incentive Program, a company must meet the following baseline criteria:

1. Life Sciences Engagement: The company must be engaged in R&D, commercialization, or manufacturing within the definition of “life sciences” under M.G.L. c. 23I, § 2.20
2. Registration and Good Standing: The entity must be registered to do business in Massachusetts and be in good standing with both the Secretary of the Commonwealth and the DOR.6
3. Minimum Workforce: As of December 31 of the year prior to the application, the company must employ at least 10 permanent full-time Massachusetts employees.6
4. Hiring Commitments: A core component of the application is a commitment to hire new employees in the subsequent calendar year and retain those positions for a minimum of five years.3

Strategic Job Creation Targets

The MLSC uses a tiered system for job creation commitments, encouraging growth across the state.6

This tiered approach illustrates the state’s desire to diversify its life sciences ecosystem.8 By lowering the entry threshold for companies in Western Massachusetts or the South Coast, the program uses the Section 38W and related credits as instruments of regional economic policy.6

Administrative Filing and Compliance

Claiming the Life Sciences Research Credit involves specific administrative procedures that differ from the standard research credit.13

Reporting on the Corporate Excise Return

While the Section 38M credit requires the completion of Schedule RC, companies claiming Section 38W do not file Schedule RC.13 Instead, they must:

1. Calculate on a Worksheet: The DOR instructs taxpayers to perform the 10 percent incremental calculation on an internal worksheet and retain it in their records.13 This worksheet must reflect the “legally mandated clinical trial” expenses clearly.5
2. Credit Manager Schedule (CMS): The finalized credit amount (which cannot exceed the specific dollar amount authorized by the MLSC) is reported on Schedule CMS.13
3. Certificate Number: The taxpayer must enter the unique certificate number issued by the MLSC for that specific tax year award.13

Record Keeping and Audit Readiness

The Department of Revenue recommends retaining all records related to the research credit for the duration of the statute of limitations, typically three years after the return is filed.14 However, many practitioners advise a 7-year retention period due to the complexity of R&D audits and the potential for multi-year reviews by the DOR.14 For Section 38W, this documentation must include evidence that clinical trials were “legally mandated,” such as FDA communications, protocol approvals, and detailed site-level expense tracking.5

Calculation Example: The BioMed Strategic Allocation

To understand how a life sciences company might coordinate Section 38W with other incentives, consider the following hypothetical scenario.

The Subject: BioMed Innovators, LLC

BioMed is a certified life sciences company with 40 employees located in Hampden County (qualifying for the “remote” bonus).21 They commit to hiring 10 new scientists in 2024.6

1. Determination of MLSC Award:

• Base Credit per Job: $18,000.21
• Small Company Bonus (<50 employees): +$5,000.21
• Remote Location Bonus (Hampden County): +$5,000.21
• Total per job: $28,000.
• Total Authorized Award: $280,000 (10 jobs x $28,000).21

1. Allocation of the $280,000 Award:
   BioMed determines its expected tax attributes for the year and chooses to allocate the award across three incentives 21:

• Life Sciences Investment Tax Credit (ITC): $100,000 (for new laboratory equipment used in MA).10
• Section 38M Research Credit: $100,000 (for in-state R&D lab expenses). BioMed intends to seek the 90% refund on the unused portion of this specific credit.5
• Section 38W Life Sciences Research Credit: $80,000 (specifically for Phase II clinical trials being conducted at hospitals in California and London).5

1. Utilization against Corporate Excise:
   Assume BioMed has a $100,000 excise liability.14

• Excise Limitation: Under the $25,000/75% rule, BioMed can offset a maximum of $81,250 ($25,000 + 75% of $75,000).10
• Application Order: BioMed applies the $80,000 Section 38W credit first because it is non-refundable and would otherwise expire or be carried forward.5
• Remaining Liability: $20,000 of original liability remains, but the utilization cap is nearly reached. BioMed uses $1,250 of its other credits to hit the $81,250 offset cap.
• Refund Request: BioMed then requests a 90% refund on the remaining authorized Section 38M balance ($98,750), resulting in an immediate cash payment of $88,875 from the state.5

This allocation strategy allows BioMed to monetize its out-of-state clinical trials through Section 38W while simultaneously generating significant liquidity through the Section 38M refund.3

Limitations and Constraints

While powerful, Section 38W is subject to several legal and financial constraints.

The $25,000 and 75% Rule

As demonstrated in the example, a corporation’s credits may not offset more than 50% of its excise under general rules, but for the Research Credit, a more generous rule applies: the credit can offset 100% of the first $25,000 in liability plus 75% of the liability above $25,000.14 This ensures that even the most innovative companies pay at least a portion of their corporate excise, preserving the state’s tax base.14

S-Corporation Limitations

Massachusetts treats S-corporations differently for credit purposes than the federal government.14 While federal R&D credits typically pass through to shareholders, Massachusetts research credits are applied at the entity level against the S-corporation’s own excise tax (on the non-income or income measure).13 S-corporations may not share excess research credits with their shareholders.13 For life sciences startups often structured as pass-throughs, this entity-level limitation makes the MLSC’s 90 percent refund option even more critical.14

Controlled Group Aggregation

For large organizations with multiple subsidiaries (e.g., “Controlled Groups” under IRC Section 41(f)), the DOR requires aggregation.12 The entire group first calculates a total credit as if it were a single taxpayer, aggregating all QREs and basic research payments and eliminating inter-company transactions.15 Each member of the group then shares the single $25,000 “100% offset” bracket.15 This prevents groups from creating “shell” subsidiaries to claim multiple $25,000 full offsets.15

Conclusion: Strategic Implications for the Life Sciences Sector

The M.G.L. c. 63, § 38W credit is far more than a technical accounting provision; it is a structural pillar of the Massachusetts life sciences policy.1 By explicitly allowing for the inclusion of out-of-state clinical trial costs, the Commonwealth has acknowledged the global nature of medicine while insisting on a local commitment to job creation and intellectual capital.3

For a business-blog-suitable perspective, the primary takeaway for C-suite executives and tax directors is that Section 38W acts as a bridge.20 It bridges the gap between early-stage laboratory research (incentivized by Section 38M) and late-stage commercialization (which requires global clinical reach).5 The recent increase of the annual incentive cap to $40 million and the 10-year program extension signal to the international community that Massachusetts remains a stable, predictable, and highly supportive environment for the life sciences industry.3

However, the “award-based” nature of Section 38W means that excellence in tax planning must be paired with excellence in corporate growth.13 Companies must not only innovate in the lab but also deliver on their promises to the MLSC regarding jobs and regional investment.6 In this environment, the Section 38W credit serves as both a reward for innovation and a contract for continued partnership between the Commonwealth and its most transformative industry.4

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