BioLoquitur has reported on legislative developments in the past, but never did we expect to discuss a tax bill. Last week, however, the U.S. House of Representatives passed the “Tax Cut and Jobs Act” Bill (H.R. 1) and H.R. 1 deserves a spotlight. After all, one of our goals is to provide the life science industry with the latest news that could affect the industry.
Below are a few provisions that could affect U.S. pharma and biotechnology companies and others investing in those companies.
- Section 3001 reduces the U.S. corporate tax rate from 35% to 20%. If the bill goes into law, the reduction will be the largest corporate tax cut in over 100 years.
- Under Title IV, the U.S. will only tax the U.S. income of a corporation and exempt most or all foreign income. Currently, a corporation headquartered in the U.S. pays corporate income tax on all income, both U.S. and foreign income that has been brought back into the U.S.
- Section 3401 eliminates the Orphan Drug Tax Credit (“ODTC”). Currently, the U.S. provides an orphan drug manufacturer a tax credit of 50% of qualified clinical research costs incurred between the date of approval for the drug and the date that the U.S. Food and Drug Administration (“FDA”) designates the drug as an orphan drug. According to the U.S. Department of the Treasury, the tax expenditures attributable to the ODTC credit are expected to be $2.3 billion in 2017 and would grow substantially over the next ten years; eliminating the credit would thus generate billions in revenue for the United States.
- After December 31, 2022, Section 3315 provides that research and experimental expenditures are not deductible unless they are charged to a capital account, where they must be amortized over a five year period. Currently, the tax code allows such research and experimental expenses as a deduction without requiring amortization under 26 U.S.C. § 174(a).
- Section 3312 changes the tax treatment for self-created patents, taxing the gains from sales of such patents as ordinary income rather than capital gains.
- Section 3307 narrows the ability to deduct certain business expense, eliminating deductions for membership dues, any payments relating to “entertainment, amusement, or recreation,” and on-premises athletic facilities, among others.
- Section 1308 repeals the deduction for medical expenses. The tax code provides for the deduction of medical expenses that exceed 10% of an individual’s adjusted gross income. H.R. 1 eliminates this deduction. Critics suggest the elimination may potentially leading to reduced consumer spending on medical needs and/or increased reliance on government healthcare resources.
At 450 pages, H.R. 1 is a complex and dense bill — the list above is not exhaustive, of course. We will keep you updated as tax reform continues.
 Title V amends several provisions relating to exempt organization that are beyond the scope of this article, but may be of interest to research universities and foundations. If you have questions on the potential impact of Title V, please contact us and we will refer you to our tax and benefits colleagues for further information.