Why Congress must repeal the R&D amortization provision

biotech research and development

The Biotechnology Innovation Organization (BIO), along with its members, sent a letter to Congressional leadership earlier this month urging for legislative action to be taken immediately to repeal the R&D amortization provision that went into effect in 2022.

Furthermore, BIO is urging Congress to pass S. 866/H.R. 2673, also known as the American Innovation and Jobs Act, in the Senate and the American Innovation and R&D Competitiveness Act in the House.

If the R&D amortization provision is not repealed

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 a 15-year amortization for foreign R&D. As things stand, unless Congress repeals this provision, companies and industries will face several negative impacts.

Companies will no longer be able to use immediate expensing of R&D costs to invest in research, conduct clinical trials, or just simply keep the lights on until they make their transformational discovery. Additionally, mandatory capitalization of R&D costs will both reduce after-tax returns for investments in R&D (thereby making biotechnology investments relatively less attractive) and divert much needed funding away from R&D to the payment of income taxes.

Treatment therapies will be indiscriminately affected

These adverse effects will jeopardize the development of treatments coming to market many years from now. The impact will be felt in both treatments for both common and rare diseases.

Highly prevalent, chronic diseases such as Alzheimer’s, Parkinson’s, and heart disease require large, costly, and time-consuming clinical trials. Drugs for which there is a large potential patient population require significantly more cost and time to bring to market. The move to amortization directly threatens investment in treatments for these diseases.

Challenges already exist in developing therapeutic treatment options for rare diseases, such as small patient populations, variability in disease progression, and lack of well-established endpoints and poorly understood natural histories. Amortization could further limit the breadth of research and development into rare diseases. This would result in diminished hope for rare-disease patients and families who currently lack effective therapies.

TCJA already included a 50% reduction in the value of orphan drug tax credits aimed at offsetting the high clinical costs associated with rare-disease research. This is coupled with the extended 15-year amortization period now required for ex-U.S. research, which disproportionately impacts biotech companies in the rare-disease space who are forced to conduct ex-U.S. clinical trials due to small patient populations in the U.S. alone. The best possible patient outcomes should not be prevented due to amortization.

Partnerships are pivotal to biotech research

Many BIO member companies are research-intensive companies developing the next generation of biomedical and bioeconomy breakthroughs. These developments require investment in R&D. Mandatory amortization (instead of immediate deduction) of R&D costs will make it less likely that U.S. companies will develop new treatments and discoveries.

Both emerging and growing biotechs rely on partnerships with larger companies to help fund their research. These arrangements typically involve various payments to the emerging company, including upfront payments and payments upon the achievement of specified milestones.

The payments received under these collaboration agreements may be treated as taxable income. Emerging companies typically can utilize their Net Operating Loss (NOL) Carryforwards (this allows businesses suffering losses in one year to deduct them from future years’ profits), generated by the immediate expensing of R&D costs, to offset some or all of this taxable income.

As a result of this, companies can then devote a greater portion of their resources to bringing 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, resulting in the diversion of critical funds away from R&D.

A BIO short: the innovation ecosystem of life-saving drugs

Securing the best-possible patient outcomes

Reversing the R&D amortization provision will avoid the harmful impact on R&D companies and support development of future medical treatments, cures, and biotech innovations. The impact of the provision already is being felt as companies make decisions on how to allocate their resources—paying taxes or investing in development of new treatments and technologies.

BIO Chief Policy Officer John A. Murphy, III, explains to Bio.News, “We’ve come to almost take for granted that we can innovate our way out of the greatest threats we face, and biotech companies truly continue to amaze us with their cutting-edge discoveries to improve and extend life.”

biotech research and development

Murphy continues, “Thanks in large part to longstanding government policy to incentivize robust investment in research and development, we absolutely can place our faith in a robust pipeline of new treatments and cures.” He adds, “However, the requirement that companies spread out expensing of R&D costs over several years is, essentially, a new tax on innovation, which threatens future transformational or even life-saving biotech breakthroughs.”

Ultimately, for the future of innovation and the well-being of patients, it is essential that the R&D amortization provision be repealed. BIO urges Congress to proceed with repealing this provision and proudly stands with patients and champions our industry’s role in advancing the best outcomes possible while creating jobs in communities across the country.

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