Congress extends tax breaks: What life sciences companies need to know

Congress has reached a one-year agreement to retroactively reinstate more than 50 tax provisions that expired at the end of 2013.  The legislation offers the life sciences industry temporary relief on important tax benefits like the research credit and bonus depreciation, but will create new uncertainty for 2015.

On Dec. 19, 2014, the president signed the Tax Increase Prevention Act of 2014 (H.R. 5771). It extends the following important benefits for the life sciences industry:
  • The research credit
  • Bonus depreciation
  • Subpart F exception for active financing
  • Subpart F look-through rule for controlled foreign corporation income

Why one year?
Republicans and Democrats attempted to negotiate a $450 billion deal that would have extended most of the expired provisions for two years and made 10 of them permanent, including the alternative simplified research credit. But the Obama administration threatened a veto because the agreement would not have extended of enhancements of the child tax credit and the earned income tax credit, and the deal fell apart. When the negotiations collapsed, the GOP insisted on a one-year extension instead of the more typical two-year extension that lawmakers have provided in the past.

What about the research credit?
Both the House and Senate had offered proposals earlier in the year to enhance many of the expired provisions.
  • The Senate Finance Committee proposed to make the research credit refundable against the alternative minimum tax and allow it to offset up to $250,000 in payroll taxes for businesses less than five years old with less than $5 million in annual gross receipts.
  • On the House side, a bill was approved to make the alternative simplified research credit permanent at an increased rate of 20%.
Unfortunately, neither change was included in the one-year deal that ultimately passed. H.R. 5771 ultimately only provides a straight extension of current law for all the expired provisions.

What about Section 199 and the orphan drug credit?
The orphan drug credit and the Section 199 deduction for domestic production activities are permanent provisions in the code, and do not need to be extended. Life sciences companies can continue to take advantage of these provisions.

Will the medical device excise tax be repealed?
Earlier in the year, Senate Republicans blocked a bill on the expired provisions with the aim of forcing a vote on an amendment to halt the medical device excise tax. Unfortunately, there was no real discussion of including a repeal in the final extenders package. Although Republican election gains increase the chances for repeal in 2015 or 2016, the threat of a presidential veto still looms. Senate Democrats could also block the legislation using procedural maneuvers that are difficult to overcome without 60 votes.

Will Congress resurrect a longer deal in 2015?
House Republicans preferred a one-year extension of the expired provisions so they could return in January when Republicans take control of the Senate and attempt to pass even more favorable legislation. But opposition from the president and Senate Democrats could derail the party’s efforts. In addition, Republicans will immediately face many competing priorities in 2015, including efforts to repeal certain tax incentives. IT companies could again be waiting for an extension of these same tax provisions late in 2015.

What can I do now?
Life sciences companies can take the benefit on 2014 financial statements, but cannot assume an extension for 2015 financial reporting until and unless new legislation is enacted. Although prospects on a quick deal in 2015 seem unlikely, a retroactive extension of many of provisions late in the year is still very possible. Companies should continue to meet all the recordkeeping and substantiation requirements so they can claim benefits like the research credit once they are extended.

In addition, while prospects for repealing the medical device excise tax have possible, it is far from certain. Medical device makers should continue to meet all tax filing and payment requirements unless repeal is actually achieved.