Navigating Tax Trends in Life Sciences

Life sciences companies operate at the intersection of rapid innovation and increasing regulatory oversight. Tax considerations play a growing role in shaping strategy as companies adopt artificial intelligence (AI)-driven technologies, pursue research and development (R&D) incentives, respond to Section 174 changes, navigate transfer pricing pressures and engage in merger and acquisition (M&A) activity.

AI-Led Innovation and the R&D Credit

AI is now embedded in drug discovery, clinical trial design, manufacturing optimization and patient engagement. These tools can shorten development cycles but also complicate R&D credit eligibility.

The statutory test remains unchanged: activities must be undertaken for a permitted purpose, grounded in the hard sciences, aimed at resolving technical uncertainty and involve a process of experimentation. In practice, AI-enabled development most often faces scrutiny under the uncertainty and experimentation prongs.

Life sciences companies use AI-driven tools for drug target identification, predictive toxicology and clinical trial optimization. From a tax credit perspective, the key issue is whether those efforts advance scientific or technological knowledge or instead reflect analytics applied to known processes. The IRS may challenge eligibility when AI activity is framed as analytics, automation or decision-support rather than experimental development. Accordingly, careful framing and documentation are critical to demonstrate that AI efforts address scientific or technological uncertainty through experimentation.

AI in R&D Credit Documentation

AI can also improve the R&D credit process by enhancing data collection and documentation. These tools help identify qualifying activities, track development iterations and analyze technical records to capture contemporaneous support.

R&D studies rely on information collected across technical teams, and differences in terminology can create gaps in how activities are described. Aligning documentation with how scientists and engineers frame technical uncertainty and iterative testing helps ensure project narratives are accurate and defensible. AI tools can help bridge this gap by organizing technical data to support R&D credit claims.

When credit claims are examined, docu mentation gaps can undermine credibility. CPAs should strive for contemporaneous documentation that reflects how R&D and data science teams frame hypotheses, failures and iterative experimentation.

Foreign Section 174 and Transfer Pricing in Global R&D

The One Big Beautiful Bill Act (OBBBA) restored immediate expensing for domestic Section 174 research and experimental expenditures while retaining the 15-year capitalization requirement for foreign research. This divergence increases the importance of understanding where development occurs and how global R&D is structured.

Many life sciences companies operate with multinational research teams, cost-sharing arrangements, AI partnerships and co-development agreements. These arrangements require analysis of where development occurs to determine whether Section 174 costs are domestic or foreign, as well as who bears economic risk and owns the resulting intellectual property.

Multinational groups face challenges aligning Section 174 classifications with transfer pricing models. Collaboration agreements can blur lines around development control, risk assumption and IP ownership. Coordinated analysis across tax, transfer pricing and legal teams is essential.

Companies must also decide how to treat remaining unamortized domestic Section 174 costs, including whether to accelerate deductions or continue amortization. For groups exposed to BEAT or CAMT, the Section 59(e) election can materially affect cash tax profiles and should be modeled carefully.

M&A Tax Planning

Mergers and acquisitions remain an im portant growth strategy in the life sciences, and 2025 included several headline transactions. BioSpace s list of the largest biopharma takeovers reflected a series of high-profile acquisitions by Johnson & Johnson, Novartis, Merck, Pfizer and Sanofi, with deal values approaching or exceeding $10 billion.

From a tax perspective, buyers and sellers face different considerations. Buyers focus on transaction structure, basis step-ups, future intellectual property (IP) amortization and potential limitations on attributes such as R&D credits, net operating losses and Section 174 balances. Sellers must consider gain characterization and potential exposures tied to prior positions.

Tax due diligences has become a value driver in life sciences transactions. Weak R&D credit substantiation or unresolved transfer pricing exposures increasingly sur face as purchase price adjustments, escrows or indemnities. Cross-border acquisitions also raise questions about where IP value resides and who controls development.

AI-driven innovation, and an increasingly complex tax environment present both challenges and opportunities for life sciences companies. Coordinated tax planning helps manage risk while supporting continued investment in research and growth. For CPAs, the opportunity is to elevate tax from compliance to proactive design by aligning documentation with science, structuring global R&D effectively and embedding tax into growth strategies.