How life sciences companies can prepare for tax changes under Trump in 2025

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. 

The tax policy crossroads

The tax treatment of R&D expenses under section 174 became less favorable in 2022, as required by the TCJA. Beginning in 2022, companies are no longer able to fully deduct R&D expenses in the year they are incurred; instead, they have to capitalize and amortize them over five years (15 years for R&D conducted abroad.)

There is bipartisan support for reinstating immediate R&D expensing. But it’s uncertain how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.

Notably, in some prior attempts to restore full expensing for R&D expenditures, Congress has also reinstated a requirement for taxpayers to either take a reduced R&D credit or include the credit into income, reducing its value.

U.S. multinationals should also monitor the foreign-derived intangible income (FDII) provision. It was enacted as part of the TCJA and designed to incentivize businesses to conduct R&D in the U.S. by offering lower tax rates on income from U.S.-held intellectual property used abroad. 

Life sciences companies should consider:

• Their future R&D spending and whether it makes sense to conduct R&D in the U.S. or abroad. Costs for R&D conducted outside of the U.S. are currently subject to a 15-year recovery period instead of five, regardless of whether the taxpayer is located in the U.S.
• How their approach to R&D would change if Congress reinstated immediate expensing of R&D costs, including whether it makes financial sense to outsource R&D.
• How restored immediate deductibility of R&D expenses might introduce technical issues in joint ventures or other agreements to conduct R&D.
• The interplay between the R&D tax credit and tax treatment of R&D costs. While the former is often the more compelling option of the two, the restoration of immediate expensing would improve the comparison.
• 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.

Generally, a change in the corporate income tax rate would affect the amounts of after-tax income that life science companies could put back into their pipeline growth, R&D, data strategies or global expansion projects. In turn, that affects companies’ valuations and appeal to investors.

The tax policy crossroads

The corporate income tax rate dropped to 21% from 35% beginning in 2018, as required by the TCJA. Although the 21% rate does not expire, it is subject to change in new tax legislation and is garnering close attention from lawmakers and taxpayers alike. 

Life sciences companies should consider:

Medical device and biotech companies with royalty streams or license agreements can model the effects of proposed changes to the corporate tax rate and evaluate whether to monetize future royalties into a current year.

Model the effects of changing accounting methods or electing to accelerate or decelerate taxable income in order to maximize permanent savings through tax rate arbitrage. 

Determine the financial reporting implications of proposed rate changes, including how proposed changes would affect deferred tax assets and liabilities, as well as the need for footnotes or similar disclosures depending on when a rate change could be enacted. 

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.

The tax policy crossroads

Companies’ ability to deduct the entire cost of qualified assets the year they were acquired and placed in service—a provision known as bonus depreciation—began to phase out in 2023, as required by the TCJA. 

Actions life sciences companies should consider:

• Perform a cost segregation study and repairs study concurrently with any planned improvement projects in order to properly classify shorter-lived property. If 100% bonus depreciation is extended, it may be prospective only. Properly identifying asset classes and deductible repair costs is the best way to ensure the fastest recovery of capital expenditures.
• Make 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.