CARES Act Support for the Life Sciences Sector
The Coronavirus Aid, Relief and Economic Security (CARES) Act provided government relief aimed at saving jobs as well as favorable tax treatment of certain deductions and losses.
While many of these changes are far reaching for businesses nationwide, this article will focus on the life sciences industry, a major force in New Jersey’s economy that has been impacted by the COVID-19 crisis. While the travel and entertainment industries had largely halted during the state’s lockdown and other industries faced additional challenges in how they operate, the impact in life sciences has been more subtle and perhaps delayed.
Companies, including those producing drugs and/or medical equipment used in elective surgeries, found their revenues impacted in the first half of 2020. Despite an idled sales force and delayed clinical trials, several life science companies are donating their scientific discoveries, resources and capital to the development of COVID-19 treatments and vaccines.
Regardless of the industry, the CARES Act provides some relief, creating additional working capital liquidity in the short term to allow companies to continue operations.
For the emerging pharma/biotech companies that are in early stage development efforts and have not yet received FDA approval for drugs in development, the Small Business Administration (SBA) loan program may provide a source of funding to allow this subsector to continue its work. Further, other incentives offered in the CARES Act might be considered as a means to retain general and administrative staff, field forces and any other functions whose jobs may be impacted, such as the Payroll Protection Program, Employee Retention Credit and payroll tax deferral.
Some life sciences organizations may be reporting losses for the first time in years, and the CARES Act provides opportunities for tax relief to businesses related to the treatment of net operating losses, as well as charitable contributions, deduction of interest expense and acceleration of expensing certain property improvements. Here are some opportunities to consider:
- Losses: For those previously taxable taxpayers that recently incurred or are projecting a tax loss, the CARES Act allows losses incurred in 2018 through 2020 to be carried back five years and removes the 80-percent limitation on the amount of losses that could offset income that was imposed by the Tax Cuts and Jobs Act (TCJA). This relief could be substantial to the extent a company previously paid tax in a pre-tax reform year at a 35-percent tax rate. However, these calculations are complex because of the interdependencies of other provisions within the TCJA, so careful modeling to ensure another unanticipated tax is not triggered is important.
- Charitable contributions: The CARES Act allows increased charitable deductions for certain cash contributions by increasing the taxable income limitation on such deductions from 10 percent to 25 percent. Many life sciences companies have made and will continue to make significant contributions in response to the pandemic — from donations of potential COVID-19 therapies, vaccines, PPE and medical devices to the contribution of scientific expertise and technologies. Analysis of the tax implications associated with these donations can be complicated and may also include transfer pricing, customs/duties and indirect tax consequences as well as impacts to provisions introduced by TCJA (e.g., base erosion anti-abuse tax implications).
- Interest expense: For companies incurring interest expense, the CARES Act increases the limit of deductible business interest as a percentage of adjusted taxable income to 50 percent from 30 percent for 2019 and 2020 and provides favorable methodologies to determine the taxable income limitation. However, post-TCJA, more interest expense may not always yield a better tax answer for those companies paying tax as a result of transactions with foreign affiliates; therefore, modeling potential consequences is important.
- Leasehold improvements: The CARES Act also made a technical amendment related to leasehold improvements and interior components of building renovation work. While the intent under the TCJA had been to provide a 15-year tax recovery period and 100-percent expensing (bonus depreciation) with respect to such property, the legislative text mistakenly resulted in a 39-year tax recovery life with no bonus depreciation. The CARES Act has remedied this result retroactively for 2018, 2019 and 2020, and the IRS has issued related procedures that could result in tax savings.
Additional tax benefits and traps for the unwary exist outside of the CARES Act as well, particularly post-TCJA as mentioned above, and substantial TCJA-related guidance is being issued at the time of this writing. It is critical for businesses to consider the tax opportunities and consequences of planned investments and operational changes as they are being contemplated in order to provide the additional capital needed to invest into R&D — the lifeblood of these organizations.
As of late July, Congress was considering additional measures to provide economic relief, which is beyond the scope of the above discussion.
Christine M. Kachinsky
Christine Kachinsky, CPA, serves as KPMG's U.S. Life Sciences Tax Industry Leader as well as the New Jersey Tax Practice leader. She is a member of the NJCPA.
Ross Reiter, CPA, is a managing director in KPMG's Business Tax Services practice.
This article appeared in the November/December 2020 issue of New Jersey CPA magazine. Read the full issue.