Tax Planning For Life Sciences Amid Shifting Policies
By Richard Weiner, CPA, MST, CM&AA
In the life sciences sector, maintaining a strategic approach to tax planning has become increasingly complex, especially with ongoing regulatory changes affecting mergers, acquisitions, and how we treat research and development (R&D) expenses. Such tax policy shifts can directly affect corporate structure decisions, overall business strategy, and the ability to allocate resources effectively, all critical elements for executives seeking to position their organizations for long-term success. In the coming year, staying ahead of these changes will be vital.
Many states offer targeted incentives including tax credits, grants, and R&D support to help companies reduce operational costs and foster innovation. These programs aim to attract industry leaders by supporting expansion, investment, and collaboration with local universities and research institutions. Understanding these opportunities allows companies to make informed decisions on where to operate, with specific funds and R&D tax credits designed to reduce the financial barriers to innovation and commercialization.
Navigating Changes To Corporate Structure, R&D Costs, And Tax Incentives
For organizations structured as C corporations, the Qualified Small Business Stock (QSBS) exemption continues to offer significant tax planning opportunities. Under current law, shareholders of C corporations may exclude up to $10 million or ten times their adjusted basis in gains from the sale of company stock. While this provision may make C corp status particularly appealing for high-growth companies or those contemplating an eventual exit strategy, it is important to know that the QSBS benefits are limited to individuals and certain trusts, whether they invest directly or indirectly via entities taxed as partnerships.
Combined with the 21% corporate tax rate on taxable income, the use of the QSBS can provide substantial tax savings, keeping rates well below the top individual tax rate. Accordingly, it is important for investors in life sciences companies to review these rules with their advisors upon initial investment or subsequent transfer in order to ensure their holdings qualify for preferred tax treatment.
Companies must also account for recent changes to the treatment of R&D expenses. Effective in 2022, the requirement to capitalize R&D costs as opposed to deducting them immediately may have significant cash flow implications. This shift, which potentially converts financial statement losses into taxable income (especially for companies that receive their funding via governmental or private grants), could lead to unexpected tax liabilities for companies reliant on R&D to remain competitive. Legislative discussions continue regarding potential modifications to these rules, including the potential to restore prior provisions allowing for the immediate deduction of R&D expenditures. Companies should remain vigilant for any further developments in this area.
Finally, many life sciences startups face the ongoing challenge of preserving tax attributes like net operating losses or credit carryovers. Companies issuing shares to attract investment must be cautious about changes in ownership. A shift of more than 50 percent ownership during a three-year period could jeopardize the ability to preserve these valuable tax attributes. Startups should work closely with their tax advisors to review cap tables and monitor ownership changes that could trigger adverse tax consequences.
Strategic Tax Considerations For M&A, Pass-Through Entities, and Capital Expenditures
The life sciences industry is expected to experience significant merger and acquisition activity in 2025, driven by several favorable factors. Private equity investors are maintaining strong interest in the biotech and related sectors, looking for more mature companies able to generate both profits and cash flow. Similarly, larger global companies are looking for newer players that have generated proof-of-concept for their underlying science but require additional capital in order to monetize its potential.
For both types of acquirers, the combination of expected low corporate tax rates and declining interest rates could make acquisitions more attractive. Additionally, potential shifts in the Justice Department’s stance on larger deals may provide life science firms with more opportunities for strategic acquisitions or sales.
States with strong life science clusters, such as California, Massachusetts, and North Carolina, may become key targets for M&A activity. These regions are ranked among the top for MedTech innovation, offering a favorable environment for businesses to grow and secure deals. Companies contemplating these transactions should consider early tax planning to optimize the timing, which may result in substantial after-tax gains for both founders and investors.
While many life sciences companies are focused on preserving cash during the research and approval processes, which frequently makes C corporation the entity of choice, there are many smaller, profitable firms servicing or supplying the life sciences industry. For companies structured as a pass-through entity whose profits flow to individual or trust owners, such as Limited Liability Companies (LLCs), there are notable tax advantages that could enhance capital preservation and reinvestment.
Profitable pass-through entities may benefit from key tax advantages that enhance capital preservation and reinvestment. These businesses can deduct state and local taxes (SALT) at the entity level, effectively bypassing the $10,000 cap on individual SALT deductions—a significant advantage for owners in high-tax states. Additionally, the Qualified Business Income (QBI) deduction allows individual investors to exclude up to 20% of a profitable entity’s income from federal taxes. These provisions may result in substantial tax savings, offering flexibility to reinvest in growth or distribute earnings to investors.
As bonus depreciation continues to phase out, those in the life sciences making substantial capital investments may face increased up-front tax costs. However, careful planning around the timing of infrastructure or technology upgrades may allow companies to capitalize on remaining tax savings under current rules. With the potential for bonus depreciation to be reinstated or modified in future legislative sessions, companies should evaluate their capital expenditure strategies to position themselves for maximum tax efficiency in the years ahead.
Effective tax planning remains critical for life sciences companies navigating an evolving regulatory environment. With shifting policies affecting corporate structures, R&D expenses, and M&A strategies, staying ahead requires proactive decision-making. Companies that assess the tax implications of their entity structure, investment strategy, and operational expenditures are better positioned to maximize available incentives and mitigate risks. By working closely with tax advisors, life sciences firms can align their financial strategies with long-term business goals, ensuring they remain competitive in an industry driven by innovation and regulatory change.
About The Author:
Richard Weiner, CPA, MST, CM&AA, is a Tax Partner at AAFCPAs with more than 35 years of experience in tax planning and consulting. Specializing in the life sciences, biotechnology, medical device, and manufacturing sectors, he advises both private and publicly held businesses on strategic tax matters. Rich also leads the firm’s Business Transaction Advisory practice, guiding clients through the complexities of mergers, acquisitions, and ownership transitions, with a focus on long-term tax efficiency and regulatory compliance.