Negative Side Effects of Tax Reform for Life Sciences

Tax reform promises new benefits to life sciences organizations, but it’s also shaking up some established rules of the land.

Six months into the Tax Cut and Jobs Act (TCJA) going into effect, organizations are still sorting through its complexities to fully understand the implications. The biggest overhaul to the tax code in the last 32 years is largely seen as a positive for the life sciences industry, with a lower corporate income tax rate freeing capital for new investments.

But the fine print of TCJA also delivers a downside—new rules are upsetting the traditional tax benefits that organizations have enjoyed in areas such as research and development (R&D), orphan drugs and fringe employee benefits.

A few key areas worthy of re-evaluation under the new tax law include:
  • R&D write-offs adjusted: Before TCJA, organizations had the choice to immediately deduct R&D expenses or to capitalize expenses to amortize over five years. That choice will be eliminated as of Dec. 31, 2021; at that point, life science organizations will have to amortize all R&D costs over five years (for U.S. research) or 15 years (for offshore research). Life sciences organizations will need to re-examine their R&D strategies and timelines under the new rules.
  • Orphan drug tax credit sliced in half: TCJA reduces the amount of qualified, clinical testing expenses that organizations can write off for orphan drugs, from 50 percent to 25 percent. The move may cause some organizations to re-consider R&D investments in these therapies, but adjustments should be carefully weighed against other incentives still in place, such as accelerated FDA reviews and seven-year market exclusivity.
  • Fringe benefits lose tax appeal: Life sciences companies will no longer be able to write off employee fringe benefits, such as meals, transportation or anything related to entertainment or amusement. Employers will now have to either fully absorb the cost of those perks, scale them back or cease to offer them entirely.
  • Limitations around net operating losses (NOLs): The new tax code eliminates the taxpayer’s ability to carryback NOLs and limits its use to 80 percent of taxable income, tightening cash flow. Organizations with volatile earnings or emerging businesses that typically have significant NOLs in the early years will be the most heavily impacted. Alternative solutions to reducing tax liability should be explored.
Tax changes will require a complex, time-intensive review of impact to organizational strategies. A multi-functional team should be in place to assess the impact and prioritize actions.

To learn more about how other elements of tax reform will impact life science organizations, review our Life Sciences Tax Reform FAQ

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