Life sciences and the One Big Beautiful Bill Act: Implications of tax changes

The U.S. tax system incentivizes innovation and promotes global competitiveness through credits and cost recovery mechanisms intended to reduce the financial burden companies take on when they invest in new products and technologies.

More immediate deductions could provide a boost to small and middle market biopharmaceutical companies, whose R&D spending weakened since early 2021 due to restricted access to capital, reduced mergers and acquisitions and licensing activity, and a slow initial public offering market.

How the OBBBA could affect R&D for life sciences companies

Tax treatment of R&D expenses

The OBBBA reinstates the ability for taxpayers to immediately recover costs of R&D (including software development) conducted domestically beginning in 2025, while keeping the 15-year amortization requirement for R&D performed outside the United States.

Small business taxpayers have the option to electively apply the law retroactively and amend prior tax returns or elect to treat as a method change, while other taxpayers must make an election to accelerate the costs over a one- or two-tax year period in the first tax year beginning after Dec. 31, 2024. The provision to expense domestic research costs is permanent.

U.S. international tax reform: Foreign-derived deduction eligible income (FDDEI)

The foreign-derived intangible income (FDII) regime—now known as FDDEI—was designed to incentivize businesses to site foreign-derived profits in the U.S. by offering lower tax rates on income from U.S.-held intellectual property used abroad, including related inventory sales. Under the current framework, U.S. corporations conducting R&D domestically can benefit from two layers of incentives: the R&D credit during IP development and the FDII deduction upon commercialization.

The OBBBA includes changes that could increase the amount of foreign-derived income eligible for the FDDEI deduction, and it makes the FDDEI deduction more favorable for R&D-heavy companies.

Learn more about U.S. international tax reforms in the OBBBA.

Life sciences companies should consider:

• How their approach to R&D may change given the immediate expensing of domestic R&D costs, including whether it makes financial sense to outsource R&D.
• Whether it makes sense to conduct R&D in the U.S. or abroad, given that the OBBBA did not change the required 15-year recovery period for R&D conducted outside the U.S.
• How the restored immediate deductibility of R&D expenses might introduce technical issues in joint ventures or other agreements to conduct R&D.
• Whether it makes sense for eligible small businesses to amend returns for immediate domestic R&D expensing or to deduct these costs over a one- or two-year period.
• Tax planning opportunities associated with deducting all unamortized costs over one or two years, and how those options may interplay with international tax provisions such as FDII/FDDEI; global intangible low-taxed income (GILTI), which is now net CFC tested income (NCTI); and the base erosion and anti-abuse tax (BEAT).
• That future R&D credit claims may be reduced due to the interplay between section 174 and the section 280C election.
• The completeness and accuracy of their tax reporting for R&D tax credit claims and R&D expenses. The IRS is requiring additional detailed project reporting on future tax returns and is actively scrutinizing R&D tax items.
• How technology-enabled tax planning tools can help efficiently align capital deployment and R&D strategies with OBBBA provisions, reducing administrative friction while maximizing the long-term value of available incentives.
• That accelerating the amortization of prior-year R&D expenses may create significant state taxable income. After the Tax Cuts and Jobs Act was enacted in December 2017, the tax treatment of R&D expenses didn’t change until 2022. Now, with an immediate federal change, it remains to be seen how quickly states will react for future tax years.

For growth-minded life sciences companies looking to acquire fixed assets and place them into service, more favorable deductions can free up cash to develop intellectual property, reinvest in research, and expand into untapped global markets.

As the administration pushes for an increase in domestic manufacturing—especially for products of national security concern, such as pharmaceuticals and medical devices— companies should look to take advantage of bonus depreciation if they are building or expanding manufacturing capabilities.

How the OBBBA could affect the cost of capital for life sciences companies

The OBBBA introduces significant changes to 100% bonus depreciation, making it permanent for most property acquired after Jan. 19, 2025, and establishing a new temporary allowance for qualified production property.

Qualified production property is defined as non-residential building property with a depreciable life of 39 years that is used integrally in qualified production activities and placed in service in the U.S.

Learn more about the technical changes to bonus depreciation and implications for businesses.

Actions life sciences companies should consider:

• Reviewing planned expansions and determining whether construction or acquisition timelines coincide with qualified production property eligibility dates.
• Performing a cost segregation study and repairs study concurrently with any planned improvement projects in order to properly classify shorter-lived property. Properly identifying asset classes and deductible repair costs is the best way to ensure the fastest recovery of capital expenditures.
• Making various depreciation-related elections (e.g., an election not to claim bonus depreciation) that can be used to increase taxable income in one year without imposing similar treatment in a future year. If used correctly, these types of elections can provide a permanent benefit if tax rates change.
• Whether they need to update cash tax forecasts to take into account potentially smaller estimated payments in 2025.
• State and local tax incentives for capital expenditures that may be available for one jurisdiction over another. To the extent the expenditures create new jobs, there may be hiring or training grants/credits available.

The interplay between regulatory uncertainty, drug pricing constraints, and global sourcing challenges is reshaping how life sciences companies approach long-term capital planning, particularly as supply chain vulnerabilities and tariff exposure continue to pressure margins. The industry’s capital intensity—especially in the biopharma and medtech sectors—demands careful alignment of investment timing with evolving fiscal and monetary policy. 

How the OBBBA could affect capital investment in life sciences

For life sciences companies, which often rely on long-term capital to fund R&D pipelines, the revised gain exclusion rules for the sale of qualified small business stock (QSBS) may unlock new investor interest and support sustained innovation through more favorable after-tax returns.

The OBBBA enhances the QSBS exclusion, mainly through the following three changes applicable to QSBS issued after July 4, 2025:

• Provides a tiered exclusion: Allows taxpayers a 50% exclusion for shares held more than three years, a 75% exclusion for shares held more than four years, and a 100% exclusion for shares held more than five years.
• Increases per-issuer limitation: Raises the per-issuer gain exclusion cap from $10 million to $15 million (indexed for inflation) while still leaving available the 10-times-basis limit if greater.
• Increases corporate-level gross asset threshold for qualification: Increases the gross asset threshold from $50 million to $75 million (also indexed for inflation).

Learn more about the technical changes to the exclusions for small business stock and the implications for businesses.

Life sciences companies should consider:

• Examining the qualification of the business at its formation, and proactively documenting qualification such that dispositions beginning at the three-year mark are already well documented as at least partially qualifying.
• Encouraging investment at various portions of the life sciences life cycle, potentially later than traditional investments, as the shorter holding periods may more easily qualify for at least a partial exclusion.
• Monitoring the fair market value of the company’s assets, identifying when the potential to exceed the new higher asset threshold of $75 million is on the horizon, and taking on new investments prior to any value spike.

Entity structuring can shape how life sciences companies grow and compete. Their reliance on intellectual property, complex R&D partnerships, and global supply chains makes entity structuring a strategic lever that affects everything from how companies raise capital to how much tax they pay. A well-designed entity structure helps a life sciences company stay nimble, manage risk, and make the most of available tax benefits—all while supporting long-term innovation and value creation.

How the OBBBA could affect entity structuring for life sciences companies

The OBBBA modifies some domestic tax benefits that depend partly on a company’s entity structure.

Exclusions for small business stock

The OBBBA expands the scope and benefits of this provision designed to incentivize investment in startups and small businesses. The provision allows noncorporate taxpayers (i.e. pass-through entities) to potentially exclude from federal tax up to 100% of capital gains from the sale of qualified small business stock if certain requirements are met.

The expanded scope and benefits should drive investments in critical new technologies being created and developed by small businesses in the U.S., and it will increase the number of companies exploring C corporation status when considering entity choice. 

Learn more about the technical changes to the exclusions for small business stock and the implications for businesses.

Qualified business income (QBI) deduction

For noncorporate taxpayers (i.e. pass-throughs), the OBBBA makes permanent the 20% qualified business income deduction. Owners with material amounts of qualifying business income will find this change a welcome relief from the potential tax increases that would have come had the provision expired at the end of 2025.

Learn more about the technical changes to the QBI deduction and the implications for businesses.

Life sciences companies should consider:

Whether the range of changes made by the OBBBA, in conjunction with updated business planning, makes a particular entity type more attractive

Life sciences companies that seek to expand must contend with an evolving global tax landscape that affects their international operations, intellectual property management, tax planning strategies and compliance requirements. These pervasive challenges necessitate careful consideration of cross-border transactions and regulatory changes to optimize their global footprint and manage tax liabilities.

How international tax reforms in the OBBBA could affect life sciences companies’ global footprint and supply chain

American competitiveness

Tax rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) were designed to encourage U.S. companies to keep intangible assets and the associated profits within the United States. Together, they aimed to balance American competitiveness globally with the federal government’s need for revenue. The OBBBA maintains the concepts but modifies FDII and GILTI by:

• Modifying the calculations to remove exclusions based on fixed asset investment and soften expense allocation requirements
• Slightly increasing the corresponding effective tax rates (ETRs) and changing the foreign tax credit limitation
• Renaming to foreign-derived deduction eligible income (FDDEI) and net CFC tested income (NCTI), respectively

FDII, now FDDEI: The FDII deduction regime was designed to encourage U.S. corporations to retain high-value functions, such as intellectual property ownership and sales operations, within the U.S. by offering a reduced ETR on income earned from exporting goods and services to foreign markets.  While the OBBBA increases the headline ETR of this benefit, other changes are favorable to the calculation. In particular, a provision was removed that previously reduced the FDII benefit relative to a company’s U.S. fixed asset investment. This change removes a barrier that had nominally de-incentivized U.S. based manufacturing.

GILTI, now NCTI: Changes to the calculation of GILTI, now NCTI, de-incentivize fixed asset investment in controlled foreign subsidiaries, and may therefore discourage manufacturing in foreign subsidiary jurisdictions. However, changes to the operation of foreign tax credits with respect to NCTI may serve to offset or even neutralize this problem.

NCTI is the closest domestic tax regime to an income inclusion rule (IIR) under the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework. On June 28, 2025, the G7 recognized that the U.S. minimum tax architecture, namely the NCTI regime and the corporate alternative minimum tax (CAMT), provides a functionally equivalent response to the OECD’s Pillar Two tax, sufficiently close in substance to avoid additional top-up taxes under OECD rules.

Profit shifting and base erosion

The base-erosion and anti-abuse tax (BEAT) is a minimum tax designed to prevent large multinational corporations from avoiding U.S. tax liability by shifting profits abroad. The OBBBA permanently lowered the scheduled BEAT rate from 12.5% to 10.5% and eliminated the unfavorable treatment of certain credits that could be applied against regular tax liabilities after Dec. 31, 2025. 

Learn more about U.S. international tax reforms in the OBBBA.

Tariffs

Tariffs are separate from the OBBBA, but as they continue to be applied, they could have profound implications for U.S. importers specifically and the economy in general. Depending on the details, increased tariffs could increase companies’ sourcing costs, impact export revenues if trading partners retaliate, and compel life sciences companies to further reconfigure their supply chains.

Life sciences companies should consider:

• U.S. international tax changes and the corresponding implications on their global footprint. Manufacturers should pay particular attention to their supply chain and economic presence in foreign jurisdictions, as tariffs could significantly limit their cash flows. Additionally, they should be mindful of the global minimum tax. Collectively, NCTI, FDDEI and tariff changes could significantly change the calculus on manufacturing site selection and supply chain.
• Whether their global structure for managing intellectual property is tax-efficient, including the situs of their R&D activity and efficacy of any cost sharing arrangements currently in place. In particular, companies should carefully weigh foreign local R&D incentives against increased U.S. tax from NCTI related to the 15-year amortization period to which foreign R&D costs are subject.
• Updating transfer pricing strategies to optimize how much profit is subject to tax in various jurisdictions.
• That an increase in the ETR on GILTI (i.e. NCTI) could affect the overall ETR on foreign activity and the company’s cash position.
• Whether and to what extent to accelerate deduction of capitalized domestic R&D costs, to avoid unfavorable ETR whipsaw from reduced section 250 deductions and foreign tax credits.
• Staying engaged on Pillar Two. U.S. multinational manufacturers operating in countries that have adopted Pillar Two are subject to the GLoBE rules, despite recent events involving the G7. They need to assess their exposure to the top-up tax and establish a robust reporting process. Compliance with Pillar Two will necessitate the aggregation of extensive global data and the execution of complex calculations.
• Whether they are appropriately identifying R&D supplies, including clinical trial lots, to exclude them from proposed and enacted tariffs.
• Whether they may be able to capitalize on several well-established customs and trade programs to mitigate the effects of increased tariffs.

• Whether they are missing out on refund opportunities or preferential tax rates related to customs, tariffs and indirect taxes, which could release cash and improve above-the-line results.
• Evaluating the precision of tariff classification codes they use, as imprecise codes commonly result in unnecessary costs.
• Setting up foreign sales offices and distribution centers that participate in the sales of their export products. Such income could potentially increase their ability to utilize foreign tax credits.