Tax Incentives To Spur Innovation: BIO's "Big Ideas" Beyond FDA

The Biotechnology Industry Organization’s “big ideas” for spurring investment in biotechnology range from a 50% tax credit for “angel” investors to creation of R&D partnership structures that allow investors to take the tax credits that are earned, but not taken, by unprofitable biotech companies. Current tax law does not adequately promote investment in the health care sector, BIO Board Chairman and Human Genome Sciences CEO Tom Watkins said at a June 29 press briefing outlining the industry’s desire for investor tax breaks. “Our companies need help in an environment where capital has simply become unavailable,” he said. Some of the tax proposals could be included in congressional efforts to reform the tax code. A joint meeting of the House Ways and Means Committee and the Senate Finance Committee will kick off that endeavor July 1 with a review of how debt financing is taxed relative to equity financing. The committees “need to ask how to encourage businesses to invest in growth,” Finance Committee Chairman Max Baucus, D-Mont., commented in a statement on the hearing. BIO also is seeking reforms at FDA to speed drug approval so venture capitalists can recoup their investments more quickly (“ (Also see "BIO’s "Big Ideas" For FDA Reform Are Too Big For PDUFA" - Pink Sheet, 4 Jul, 2011.)
“Big Idea”	Details	Background
Angel investor tax credit	BIO is proposing a 50% tax credit for investors who put their money into emerging biotech companies (those with fewer than 500 employees) that research innovative technologies.	Numerous states have angel investor credit programs that can serve as a model for the federal program. Connecticut provides a 25% credit, up to a maximum of $250,000; Minnesota also has a 25% credit, but with an individual maximum of $125,000, and a total cap of $15.9 million in 2011. Limitations for a federal program will be set by discussions on Capitol Hill, BIO says.
R&D partnership structures	Structured partnerships for R&D projects would allow investors to put their money in the structure, rather than a company, and then offset their individual income with tax credits and losses that flow from the company through the structure.	BIO took this proposal to Capitol Hill this spring with testimony before the Senate/House Joint Economic Committee (Also see "Tax Incentives For Biomedical Industry Are Focus Of Multiple Bills In Congress" - Pink Sheet, 13 Jun, 2011.). Investors already have this option in some industries, such as real estate and gas exploration, BIO says.
Improved capital gains treatment for small businesses	This would redefine a qualified small business and make other modifications to Section 1202 of the Internal Revenue Code so investors in biotech companies would be eligible for a reduced capital gains tax rate. Companies with valuable intellectual property and successive rounds of financing do not meet the current Section 1202 definition of qualified small business.	Lower capital gains tax rates, in one form or another, have been on BIO’s agenda for years . Most recently, BIO sought short-term preferential treatment as part of the stimulus package (Also see "BIO Says Tax Revisions Would Relax Tight Money For Biotechs" - Pink Sheet, 14 Nov, 2008.).
Matching grants for start-up investments	The government would provide grants to match venture capital investments in targeted early-stage companies, such as biotechs.	The Obama Administration has shown itself open to direct financing of drug development. As part of a medical countermeasures initiative, the administration proposed a strategic investment fund for companies developing medical products for responding to a medical emergency (Also see "VentureHHS: Government Fund Would Invest In Firms Developing Medical Countermeasures" - Pink Sheet, 19 Aug, 2010.).
Net operating loss reform	BIO wants a rewrite of the Internal Revenue Code Section 382 to exclude certain qualifying investments, such as rounds of venture financing, from the definition of ownership change. The current definition prevents biotechs that rely on serial VC investments from taking the NOL deductions, making them less attractive for mergers and initial public offerings.	This is a proposal that previously has garnered bi-partisan support in the House (Also see "Biomedical Tax Incentive Bill Allows Firms To Retain Credits After Equity Financing" - Pink Sheet, 10 Nov, 2004.).
Tax holiday on overseas earnings repatriated to the U.S.	Tax rates would be lowered on foreign earnings brought home for reinvestment by multinational firms.	Rep. Brian Bilbray, R.-Calif., already has introduced the Job Creation and Innovation Investment Act (H.R. 1036), which would allow foreign earnings to return to the U.S. tax-free if they are used to pay for R&D or expansion (Also see "Repatriation Reprise: House Bill Offers Tax Breaks For R&D, Manufacturing Investments" - Pink Sheet, 21 Mar, 2011.). The bill has not yet been put on the calendar for the House Ways and Means Committee.
Reduced taxes on income from certain intellectual property	The corporate tax rate would be reduced for income generated from certain types of intellectual property.	This would provide innovative companies with a greater return on their R&D expenses, thereby attracting more investment to U.S. biotechnology and resulting in more research projects being conducted in this country, BIO contends.
Amortization reform	This would amend Section 197 of the Internal Revenue Code to allow faster amortization of intangible assets held by small biotech companies.	The ability to quickly write down a small biotech’s assets would encourage large company investors to put their money into small firms’ research programs at an earlier stage, BIO says.