United States

Life sciences 2018 tax year in review—and a look ahead

INSIGHT ARTICLE  | 

Proper tax planning is imperative in order to avoid unnecessary tax exposure and minimize risk. In 2018, there were many tax developments affecting life sciences companies. Among the most significant areas of change was the establishment of a minimum tax on payments to foreign-related parties, and the IRS’s announcement of a new development in the area of corporate spin offs that is particularly favorable to taxpayers in the life sciences space. RSM addressed many significant tax-related issues stemming from the Tax Cuts and Jobs Act (TCJA) in our webcast: “What does the Tax Cuts and Jobs Act mean for life sciences companies”?  Life sciences companies should consider the 2018 developments discussed below, which have implications for the industry.

Also included below are links to federal and state and local tax planning guides.

International tax planning

Base erosion and anti-abuse tax: Gross receipts calculation
The Tax Cuts and Jobs Act (TCJA) brought significant changes to the international tax provisions of the Internal Revenue Code. One such significant change was the introduction of the base erosion and anti-abuse tax (BEAT).

In an effort to prevent companies from reducing their U.S. tax liability by stripping earnings from the United States, the TCJA established a minimum tax on payments to foreign-related parties. BEAT only applies to corporations that have average annual gross receipts of at least $500 million for the three-tax-year period ending with the preceding tax year, and a base erosion percentage of at least 3 percent. Taxpayers subject to BEAT are required to pay a tax equal to the excess of 10 percent of the taxpayers’ modified taxable income, less the taxpayers’ regular tax liability and certain specified tax credits. BEAT is generally 5 percent for 2018, 10 percent through 2025 and 12.5 percent thereafter. This article provides background and calculation of BEAT.

Federal tax

Tax deduction for pharmaceutical drug inventory
Certain pharmaceutical companies might be able to enjoy improved cash flow through an enhanced tax deduction for the charitable donation of inventory. Guidance for enhanced tax deductions related to the contributions of inventory for the care of the ill, needy or infants by a corporation to a charitable organization is provided under Internal Revenue Code (IRC) section 170(e)(3) and is explained in this article.

Tax Cuts and Jobs Act for life sciences companies
If you missed our webcast, What does the Tax Cuts and Jobs Act mean for life sciences companies?, or if you need a refresher, watch the brief clips in our recap highlighting domestic and international implications related to the federal tax reform.

Discussion includes the impact of a reduced corporate tax rate on life sciences businesses, the move to a territorial type system, and considerations related to the dividend received deduction and alternative minimum tax credit. Other provisional changes directly affecting life sciences companies are also presented.

In addition, check out the entire presentation to get further information on state tax considerations, including insights on revenue neutral, credits and incentives, state footprint implications, subpart F modifications and more.

IRS legal advice requires capitalization of ANDA costs
Pharmaceutical companies incur costs at various stages before marketing their product, including investigation costs, Food and Drug Administration (FDA) filing fees and legal fees. To market a generic version of an already approved drug, the maker of that generic drug must submit an abbreviated new drug application (ANDA) to the FDA. It is no secret pharmaceutical companies are faced with immense patent litigation costs, as the filing of an ANDA is considered a technical act of infringement under the Patents Act. The act requires the patentee pioneer drug manufacturer to file suit within a prescribed number of days of the ANDA filing. The treatment of these expenses, whether deductible or capitalized, is the subject of many IRS examinations. A recent legal advice issued by field attorneys (LAFA) issued by the IRS outlines the facts and circumstances considered when ruling on the proper treatment of similar expenses incurred by a pharmaceutical company. This article provides background and summarizes requirements.

Tax-free spinoffs before product sales stage could become a reality
On Sept. 25, 2018, the IRS announced a new development in the area of corporate spinoffs that is particularly favorable to taxpayers in the life sciences industry. To qualify for tax-free treatment of a spinoff under existing regulations, where a company spins off a business, both the distributing (D) and controlled (C) corporations must ordinarily generate revenue. This announcement is welcome news to taxpayers in the life sciences and technology sectors. It may well be good news to investors as well, and may help accelerate development of new products by lowering tax barriers to new investment. The announcement is a clear acknowledgement that flexibility in tax rules surrounding mergers and acquisitions transactions in a fast-moving business environment is a necessity. Taxpayers should consult a tax advisor if they are considering such a spinoff.    

2018 year-end tax considerations

2018 year-end tax considerations for businesses
This guide reflects the tax considerations and developments that we believe may create risk or opportunity for businesses in 2018 and beyond. It is not a holistic list of all tax issues that may affect your business, but is designed to help you make informed decisions related to year-end tax planning.

Additional 2018 year-end tax issues

2018 state tax legislative changes
2018 year-end state and local tax considerations

Tax planning guides and rate information
Our annual guide provides succinct analyses, tips, rate charts and other useful data to help businesses and individuals with tax planning.

A look ahead

With the current environment in Congress, passage of any type of bipartisan tax legislation will be challenging. Regardless, there are still legislative fixes and guidance needed on various parts of the TCJA. In order to avoid legislative gridlock in 2019, lawmakers are most likely going to have to find common grounds and reach across party lines.  Life sciences companies will need to stay abreast of ongoing changes and further developments.

AUTHORS


Life Sciences Insights

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Contact Our Team

John Lanza  
National Life Sciences Practice Leader

800.274.3978
John.Lanza@rsmus.com