Five years ago today, the Protecting Americans from Tax Hikes (PATH) Act was signed into law, with several helpful provisions for small, start-up, and pre-revenue biotechs. John Guy, BIO’s Manager of Emerging Companies Policy, explains the law and what needs to be done to expand the R&D tax incentives in the future.
As biotech companies (especially small ones) know, it’s extremely expensive and time-consuming to research and develop new innovations—and there’s no guarantee of a return on investment.
Enter the PATH Act, which became law on December 18, 2015, and permanently extended the R&D tax credit and the Small Business Stock Gains Exclusion (Section 1202 of the tax code), providing stability to investors and the companies they invest in.
The PATH Act also established a payroll R&D credit, which for the first time allowed pre-revenue innovators to take part or all of their R&D credit against their payroll tax liability (instead of their income tax liability), as the IRS explains.
This provision is particularly important for high-tech companies who invest heavily in R&D but don’t have a product on the market (yet). Before the PATH Act, these companies couldn’t take advantage of the R&D incentives—since they didn’t have an income tax liability.
But many start-ups can’t access the benefits of the PATH Act provision due to restrictive eligibility requirements, BIO’s John Guy explains.
Fortunately, Congress has taken notice of the payroll R&D credit’s shortcomings. Among the recent legislative proposals is the Furthering Our Recovery With American Research and Development (FORWARD) Act ( S. 3593/H.R. 6713), which would expand access to the credit to companies with up to $20 million in gross receipts over a span of 8 years and increases the amount of the credit to $1 million. In addition, a new de minimis threshold delays the start of the 8-year window until gross receipts exceed $25,000.
Read John’s blog post for more on the eligibility qualifications and the proposed bills to ensure all small businesses have access to the R&D credit as policymakers intended.
BIO will continue advocacy efforts toward building on the payroll R&D credit. We’ve developed a survey to assess the utilization of the credit by high-tech companies, which will launch in early January. Click here to be notified when the survey goes live.