The mark-up of each bill is ongoing, and further changes are expected to be released later this week with the intent of having a bill ready for the President’s signature before the end of this year. Below is a brief overview of the five changes likely to be of greatest interest to life sciences companies.
The current top corporate federal income tax rate is 35%. Under the proposed House and Senate bills, the top corporate income tax rate would be permanently reduced to 20%. Companies should consider accelerating deductions or making certain accounting method changes to take advantage of the changing rates. Note, non-automatic accounting method changes must be filed on or before December 31, 2017 to be effective for the 2017 tax year.
Currently, section 199 allows taxpayers to claim a deduction for qualified production activities income derived from certain production activities and services performed in the United States. Both the House and Senate bills would eliminate the deduction. The House bill would be effective 1/1/2018 except for certain activities performed in Puerto Rico. The Senate bill would be effective 1/1/2019.
Under current law, Section 45C allows a drug manufacturer to claim a credit equal to 50% of qualified clinical testing expenses (the orphan drug credit). The House bill eliminates the credit for clinical testing expenses related to certain drugs for rare diseases or conditions. The Senate bill limits the credit to 50% of qualified clinical testing expenses that exceeds 50% of the average qualified expenses for the previous three taxable years, effectively halving the credit. Expenses that are otherwise disallowed would be allowed under the R&D tax credit and deductions, but for a smaller benefit.
Both the House and Senate bills are proposing a change to a territorial system by providing a 100% dividends received deduction to U.S. corporations when amounts are repatriated from foreign subsidiaries. As part of the change, the proposed bills each include a one-time “deemed repatriation” for cash and illiquid assets held overseas. The House would tax these at 14% for cash and 7% for any illiquid assets, the Senate’s plan imposes rates of 10% on cash and 5% on illiquid assets.
In addition to the change to a territorial system, both plans would impose an excise tax on certain payments made by a U.S. corporation to a related foreign entity.
Many life sciences have complex global supply chains and significant intangible assets and IP overseas. The proposed changes may require companies to reexamine their pricing structures and royalty payments.
Currently, there is no limitation on the ability for a business to deduct interest expense. Both the House’s and Senate’s proposed bills would limit deduction for net interest expenses incurred by a business in excess of 30 percent of the business’s adjusted taxable income.
Finally, it is worth noting that US accounting rules (under ASC 740-10-35-4) require the adjustment of deferred tax assets and liabilities in the period in which tax legislation is enacted, and the adjustment must be included in income from continuing operations. If one of the proposed tax plans, or a combination of the two, is enacted in the near future, taxpayers will need to act quickly to assess potential impact the changes would have on their company.
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