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

ARTICLE | November 15, 2024

Authored by RSM US LLP

Life sciences companies have more clarity about the direction of tax policy in 2025 now that Donald Trump has been elected president and Republicans have flipped control of the Senate while retaining control of the House of Representatives.

The unified Republican Congress will be able to quickly pursue broad legislation that remakes the U.S. tax landscape before dozens of provisions in the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025. With nonexpiring TCJA provisions and provisions outside of TCJA also subject to change, new legislation could significantly alter life sciences companies’ cash flows and tax obligations.

Ahead of any tax changes in 2025, life sciences companies can equip themselves to make smart, timely decisions by understanding how different tax policy scenarios would affect their tax profile, cash flow projections, valuation and net income.

Below, we highlight for life sciences companies several key business issues that tax changes could affect.

Research and development

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.

R&D expensing under section 174

Foreign-derived intangible income (FDII)

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.

Income and growth

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.

Corporate income tax rate

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.

Cost of capital

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.

Bonus depreciation

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.

Global footprint and supply chain

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.

The tax and trade policy crossroads

• American competitiveness: The TCJA established tax rates for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) to encourage U.S. companies to keep intangible assets within the United States. Together, they aim to balance American competitiveness globally with the federal government’s need for revenue. Absent new legislative action, these rates are scheduled to increase, further tipping the scales in jurisdiction selection for various business operations.
• Profit shifting and base erosion: The base-erosion anti-abuse tax (BEAT) is a minimum tax introduced by the TCJA to prevent large multinational corporations from avoiding U.S. tax liability by shifting profits abroad. It applies a 10% minimum tax on taxable income excluding certain payments made to foreign affiliates. Absent legislative action, the rate is scheduled to increase in 2026. Relatedly, the United States has not adopted the Organisation of Economic Co-operation and Development’s GLoBE Pillar Two rules, including a global minimum tax. However, many other OECD member countries either have implemented Pillar Two or have committed to doing so.
• Tariffs: Trump favors the use of tariffs in certain situations. How tariffs are applied 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 companies to further reconfigure their supply chains.

Foreign-derived intangible income (FDII)

Global intangible low-taxed income (GILTI)

Base erosion and anti-abuse tax (BEAT)

Life sciences companies should consider:

• Whether their global structure for managing intellectual property is tax-efficient, and how streamlining supply chain components could support operational and tax efficiency.
• Updating transfer pricing strategies to optimize how much profit is subject to tax in various jurisdictions.
• 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.
• The precision of tariff classification codes they use, as imprecise codes commonly result in unnecessary costs.

The tax policy road ahead for life sciences

Expect the path to new tax legislation in 2025 to be unpredictable, difficult to follow at times and lined with conflicting claims by lawmakers, think tanks, news media and other analysts. However, life sciences companies have a guide.

Those that work closely with their tax advisor to monitor proposals can model how potential tax changes would affect their cash flows and tax obligations. This can equip companies to stay confidently on course and make smart, timely decisions once policy outcomes become clear.

In recent years, many tax law changes have become effective on the date a bill was introduced rather than the date it was signed into law or later. Businesses that are prepared for law changes and their effects will likely experience the greatest benefits.