Two pieces of federal legislation that could extend tax credits to research-centric businesses, including CROs and other companies that conduct clinical research, have been introduced—one in the Senate and one in the House.
The Domestic Research Enhancement Act of 2015 (H.R. 2481), introduced in the House in May, would modernize the R&D tax credit to recognize the role CROs now play in the development of new pharmaceuticals, biologics and medical devices. It also would extend to other industry organizations incurring contracted research expenses.
Currently, only pharmaceutical, biologics and medical device companies receive most of these tax breaks. With the dramatic shift to outsourcing, the federal legislation would include CROs. Two states, Pennsylvania and North Carolina, have more than 13,000 CRO employees combined.
The second legislation, known as COMPETE, would incentivize investment in emerging, research-centric businesses and support cutting-edge technology, including clinical research, with a similar tax credit. It also proposes to reform the rules for how investors can enter into partnerships with small, early-stage R&D companies. It has been introduced in the Senate.
“Research in the life sciences enables us to treat and cure countless life-threatening conditions to improve the quality of life for millions of Americans,” said U.S. Rep. Patrick Meehan (R-Pa.), one of the legislation’s three sponsors, along with Rep. George Holding (R-N.C.) and Rep. G.K. Butterfield (D-N.C.). Meehan said 79,000 jobs in Pennsylvania are dependent on the life sciences.
The proposal would make CROs eligible for a credit of up to 35% of qualifying research investments.
“This bipartisan legislation will expand investment in biomedical research, incentivize job creation here at home and strengthen the life sciences workforce so essential to our future and well being,” said Meehan.
Current law, established in 1981, allows sponsors that outsource their research to CROs to claim only 65% of expenses. The majority of those costs are wages under the credit. However, the remaining 35% of expenses disappear. Even when CROs acquire research facilities from pharma companies they are not eligible to receive the tax credit.
By contrast, Canada provides a 15% non-refundable federal tax credit on eligible expenditures. This is an incentive for which Canadian CROs generally are eligible, if the R&D funding is received from a foreign client or they encounter cost overruns when working with a Canadian client. France and the U.K. also offer CROs a share of the tax credit.
“This important piece of bipartisan legislation will ensure that the United States remains a leader in medical innovation and encourages employment in the high-wage research sector,” Jamie Macdonald, chairman of the Association of Clinical Research Organizations (ACRO), said in a statement. “Similar provisions are included in the bipartisan COMPETE Act introduced earlier this year.”
COMPETE, formally known as the Competitiveness and Opportunity by Modernizing and Permanently Extending the Tax Credit for Experimentation Act of 2014 (S.537), was reintroduced in February and would expand and enhance the R&D tax credit for qualifying research investments. It would allow firms undertaking contract-funded research projects to claim a portion of the credit. Under COMPETE, small businesses would be able to enter into a joint venture with an R&D project’s investors, in which the losses and credits generated by the research would then flow through to the company and investors.
“Although the Senate bill is more comprehensive, the results for CROs would be the same as the Domestic Research Enhancement Act, just with different language, as it is more of a single issue legislation,” said John Lewis, ACRO’s senior vice president of policy and public affairs. “This also is the first time two tax bills have been introduced in Congress that benefit contract research.”
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