Weekly Policy Update: CBSA Urges Repeal of Harmful R&D Amortization Provision
By: Colorado BioScience Association Date: 07/01/2022
Earlier this month, Colorado BioScience Association (CBSA) partnered with Biotechnology Innovation Organization (BIO) and sent a letter to Congress urging immediate legislative action to repeal the harmful R&D amortization provision that went into effect in January. The 2017 Tax Cuts and Jobs Act (TCJA) changed the longstanding deduction for R&D expenditures to a mandatory five-year amortization for domestic R&D and fifteen-year amortization for foreign R&D, with the effective date delayed until 2022.
R&D, especially in life sciences, supports economic growth. For years, R&D has been encouraged with both tax and non-tax incentives. For CBSA member companies, this policy will divert critical funds away from small R&D-intensive companies, potentially doing long-term damage to the development of the future treatments and limiting life-saving innovations, products, and services that improve and save lives.
Negative Impacts of R&D Amortization:
- Threatens Capital Investment
- Developing the next generation of breakthroughs takes significant capital. Drug development has one of the lowest success rates—less than 10%. It can take over 10 years and more than $1.4 billion to bring a single drug to market.
- Continued investments in the life sciences industry are critical to keep innovations moving through the pipeline. Creating a mandatory capitalization of R&D costs will reduce after-tax returns for investments in R&D and divert needed funding away from R&D to the payment of income taxes, threatening the development of future innovations.
- This R&D amortization provision makes funding more difficult especially during a time when funding in the life sciences industry is already difficult.
- Diverts Funding Away from R&D
- In addition to diminishing investment dollars, mandatory amortization will directly diminish the amount of capital small companies are able to devote to research.
- Both emerging and growth companies rely on partnerships with larger companies to help fund their research. The payments received under these collaboration agreements may be treated as taxable income.
- Emerging companies typically can utilize their NOL carryforwards, generated by the immediate expensing of R&D costs, to offset some or all this taxable income. This allows companies to devote a greater portion of their resources to bring their product to market faster.
- For many companies, the move to amortization will likely result in a tax liability because they will have smaller NOL carryforwards, diverting critical funds away from R&D.
CBSA advocates for proposals that strengthen the incentives necessary to sustain innovation in the life sciences and create high-wage, high-value jobs. Immediate action is critical to avoid further harmful impacts on R&D companies and to support the development of health innovations, products, and services that improve and save lives.