The OBBBA: Biopharmas Unlock R&D Expensing, Global Tax Efficiencies

By Amanda Laskey and Jennifer Smyla Brunell, RSM US LLP

Biopharma innovators may soon see major tax breaks thanks to the One Big Beautiful Bill Act (OBBBA). The new legislation introduces targeted tax incentives designed to strengthen domestic research and development and capital investment for biopharma companies, offering a strategic boost as these organizations pursue innovations that improve global health outcomes.

R&D Capitalization Strategy Should Involve Modeling

For small and midsize biopharma companies, the changes to the capitalization of R&D costs proved not to only be an administrative burden, but for some taxpayers with even a small amount of gross receipts, whether from sales or a licensing agreement, the required capitalization of section 174 costs moved taxpayers to a cash tax position. For these companies that had historically been in losses, the burden of capitalizing R&D costs placed a huge strain on the limited resources of these small and midsize biopharma companies.

Under the OBBBA, taxpayers have options with respect to new domestic R&D costs incurred in tax years beginning after Dec. 31, 2024. Taxpayers may either deduct domestic R&D expenditures paid or incurred during the taxable year or capitalize and amortize the R&D expenditures over at least 60 months beginning with the month in which the taxpayer first realizes benefits from such expenditures.

Starting with tax years beginning after Dec. 31, 2024, companies will have several options to recover the unamortized domestic section 174 expenditures incurred and capitalized in tax years before 2025:

1. Deduct all remaining unamortized domestic R&D costs over one or two years.
2. Continue amortizing the domestic R&D costs on the existing schedule.
3. Eligible small businesses may amend 2021–2024 returns to retroactively deduct domestic R&D costs.

Choosing the optimal path depends on multiple factors, including interactions with other tax provisions that could result in a permanent increase or decrease of tax benefits; the reduced credit election for the R&D tax credit; and timing of revenue streams. For example, companies anticipating licensing income in future years may prefer a two-year deduction to align tax benefits with income recognition to optimize net operating losses or other attributes.

For companies looking to optimize their tax position with regard to section 174, there is no one-size-fits-all approach. Working with a tax provider to model the impacts of amending (if eligible) versus deducting all unamortized amounts in one or two years, or continuing to amortize domestic R&D costs, can shed light on which approach may be the most appropriate, especially considering future business plans. For small and midsize biopharma companies, cash tax planning represents a significant opportunity to ensure that they can retain the cash needed to get to the next stage of their development life cycle.

Multinationals Face More Changes

The OBBBA reshapes key international tax provisions originally introduced in the 2017 tax reform law. Biopharma companies must assess the holistic impact on their supply chains and intellectual property strategies.

Global intangible low-taxed income (GILTI) becomes net CFC tested income (NCTI)

The fundamentals of the GILTI rules survive the transition to NCTI, that is, U.S. taxpayers must still include a U.S. tax basis version of their total foreign subsidiary profits into annual U.S. taxable income, subject to some exceptions.

The key change to the computation is that under NCTI, the level of fixed asset investment in those foreign subsidiaries no longer shields a portion of the income from U.S. taxation. However, this “shield” was limited to 10% of the net tax value of a subsidiary’s assets and was further reduced by net interest expense. Therefore, many taxpayers derived only immaterial benefits from these provisions. U.S.-based biopharmas with significant manufacturing operations outside of the U.S. may feel the effects of this change more keenly than others.

The OBBBA made two additional key changes to the effective tax rate (ETR) imposed on the NCTI inclusion:

• The section 250 deduction drops from 50% to 40%, raising the headline ETR from 10.5% to 12.6%.
• The foreign tax credit limit increases from 80% to 90%, partially offsetting the deduction reduction. The foreign ETR needed to fully offset U.S. tax rises from 13.125% to 14%.

Importantly, interest expense is no longer allocated against NCTI in the foreign tax credit calculation, removing a key limitation.

Foreign-Derived Intangible Income (FDII) Becomes Foreign-Derived Deduction-Eligible Income (FDDEI)

The FDII deduction under section 250 provides a favorable ETR on certain income streams derived by U.S. corporations from foreign payees. For example, royalties and license fees from foreign licensors, income from services to foreign customers, or income from exported inventory property would generally be eligible for FDII benefits.

Under the FDII rules, a carve out is applied with respect to net value of fixed assets within the U.S., ostensibly to grant FDII benefits only to that income derived from intangible property. In concert with the fixed asset shield discussed above, these provisions have long been criticized as incentivizing overseas capital expenditures (CAPEX) (to shield GILTI) and discouraging U.S. CAPEX (to increase FDII).

In the shift from FDII to FDDEI, key changes include:

• Removal of the fixed asset component of the calculation.
• Elimination of interest and R&D expense allocations against eligible income.
• Reduction in the deduction benefit, increasing the headline ETR from 13.125% to 14%.
• Exclusion of gains from the sale or disposition of intangible, depreciable, or depletable property.

Minor Changes To The Base Erosion And Anti-Abuse Tax (BEAT)

Enterprises meeting the $500 million revenue threshold for BEAT should take note:

• The BEAT rate was raised slightly from 10% to 10.5%, an improvement from the scheduled permanent increase to 12.5% for tax year 2026.
• Taxpayers’ ability to derive benefit from R&D credits against BEAT has been preserved; this was scheduled to sunset in 2026.

Key Takeaways And Cautions On The International Provisions

Of paramount importance: The above math only works for entities in a U.S. taxable income position. If a company is generating taxable losses or using net operating losses in the U.S., there is no benefit from section 250 or the foreign tax credit; NCTI, like GILTI, will use up domestic losses at the full 21% rate; and FDDEI is worthless.

Taken a step further: Be judicious in unleashing capitalized R&D expenses under the new relief. When federal taxable income drops, the ETR on NCTI can increase; FDDEI can lose its value and does not carry over year to year; and BEAT risk increases as taxable income approaches zero.

Saying the quiet part out loud: U.S. tax treatment of foreign R&D expenses has not changed. These expenses are still subject to capitalization and 15-year amortization, driving up NCTI.

A note about interest: Changes to interest expense treatment and limitations are also a recurring theme in the OBBBA. Note the above favorable changes in interest allocations against NCTI and FDDEI. The OBBBA also changed domestic interest expense limitations to specifically exclude any benefit from NCTI and similar provisions in unlocking domestic interest expense deductions; that is, while the NCTI income is taxable, it does not increase the interest expense limitation. New and newly unleashed R&D deductions may also tank domestic interest deductibility. Could offshore leverage become more attractive?

Additional Tax Changes Can Provide Tax Benefits To Biopharmas

Small and midsize biopharma companies that are looking to acquire fixed assets can elect bonus depreciation for immediate expensing of qualified production property. For those companies that do not yet have any gross receipts, there are opportunities to make elections on a year-by-year basis to maximize planning opportunities. In addition, state and local credits may exist to help incentivize the purchase of this equipment, especially if used for R&D purposes.

Furthermore, the new tax law has enhanced the qualified small business stock (QSBS), which is frequently used by small and midsize biopharmas. Over the past decade, the 100% exclusion of gain on the sale of QSBS was limited to stock held more than five years. With the OBBBA, there is partial exclusion for stock held greater than three years (50% exclusion) and four years (75% exclusion). Furthermore, the law increased the per-shareholder/taxpayer exclusion ceiling by $5 million and the corporate-level gross assets ceiling from $50 million to $75 million.

For startups, early planning should be completed to examine whether the business meets the qualification requirements as well as documentation to support the full or partial exclusion. When thinking about investment and financing, the shorter holding period should encourage investment throughout the company’s life cycle, rather than just at the formation of the company.

Tax Opportunities In A Time Of Economic Uncertainty

Many of these law changes are clearly intended to encourage U.S. investment, or at least to remove unintentional tax policy barriers to onshoring. Considering the favorable changes for domestic R&D, the exclusion of foreign sales of intellectual property from FDDEI, the extension for R&D credits against BEAT, and favorable CAPEX provisions both small and large, the wind seems to be blowing onshore for IP development and other investments in the U.S. However, tax policy is only one piece of the puzzle in supply chain and global structuring decisions. To properly weigh the impact of these changes against the multitude of issues facing the industry, biopharmas should:

• Model the impact of law changes on current structures and supply chains.
• Reevaluate debt capacity across the global structure.
• Adjust transfer pricing strategies.
• Consider whether IP ownership and R&D activities are structured efficiently; in particular, companies should carefully weigh increased U.S. tax from NCTI related to the 15-year R&D amortization period and the immediate expensing opportunity for U.S. R&D costs against their foreign local R&D incentives.
• Monitor the impact of new tariffs.

While there are certainly many challenges facing the biopharma sector, from capital limitations to reorganizations at the U.S. FDA and NIH, there are many tax opportunities available within the OBBBA, especially for companies performing domestic R&D or manufacturing. Coupled with initiatives such as the Commissioner’s National Priority Review Voucher program, there is increased focus on developing and manufacturing pharmaceuticals within the U.S. To fully capitalize on these incentives, biopharma companies should proactively model the tax implications, as doing so could unlock substantial and lasting financial benefits.

About The Authors:

Amanda Laskey is a senior manager in the tax services practice in the New York City office of RSM US LLP, focusing on clients within the life sciences industry. In addition, she is a member of the firm’s Industry Eminence Program and works alongside RSM’s chief economist and other senior analysts to understand, forecast, and communicate economic, business, and technology trends affecting middle market businesses.

Jennifer Brunell, CPA, is a partner in RSM's international tax practice. She has over 14 years of public accounting experience providing tax compliance and consulting services to clients, focusing primarily on international tax matters. Her experience includes multinational tax planning and structuring, foreign tax credits, GILTI, FDII, and BEAT planning, and managing global compliance for inbound and outbound multinationals. Brunell has a strong focus on ASC 740 for multinationals. She specializes in serving life sciences companies.