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New Tax Incentives for the Healthcare and Biotech Industries

7.31.24

The Inflation Reduction Act (IRA) of 2022 reinstated or expanded numerous tax credits and other incentives for clean and renewable energy. It also created several new credits. It is one of the biggest and most significant bills in history regarding green energy.

Businesses in the healthcare and biotech industries should be familiar with the IRA since they could benefit from many of its provisions. This article will provide a brief overview of the IRA and some examples of tax credits and incentives that could help the healthcare and life sciences sectors.

Investments in Clean Energy, Incentives for R&D

The IRA became law on August 16, 2022. While the bill’s name addresses inflation, which was still at near-record levels at the time of its passage, much of the bill’s content deals with tax incentives for clean energy investment and development. Estimates of the value of the IRA’s green energy tax credits exceed $600 billion. They could lead to a projected 42% reduction in carbon emissions by the end of the decade.

The bill’s clean energy credits cover a wide range of areas, including:

    • Clean energy production and storage;
    • Energy-efficient construction and renovation;
    • Energy-efficient infrastructure; and
    • Electric and hybrid vehicles and charging stations.

The IRA also reinstates and expands tax credits related to research and development (R&D). This can be of particular interest to the biotech industry.

Tax Credits for Healthcare and Biotech

Businesses and organizations in healthcare and biotech have two new options when it comes to monetizing tax credits thanks to the IRA:

  • Direct payment: Tax-exempt entities can take advantage of certain credits under the IRA through provisions that allow direct payment. Rather than claiming the credits against their tax bills, these entities can receive a check from the IRS.
  • Transferability: Most businesses and organizations can transfer certain credits to other taxpayers in exchange for tax-free payments.

The following are some of the provisions of the IRA that can benefit healthcare and life sciences businesses.

Production Tax Credit

The Production Tax Credit (PTC) provides a credit based on the number of kilowatt hours taxpayers produce using clean energy technologies like solar, wind or geothermal. The base amount of the credit is equal to 0.3 cents multiplied by the kilowatt hours produced from eligible sources. Taxpayers must meet prevailing wage and apprenticeship requirements to claim the PTC.

A 10% increase in the amount of the credit is available for projects located in “energy communities” designated by the IRS. Energy communities may include:

    • Brownfield sites;
    • Former coal mining or coal-fired electricity generator sites; or
    • Areas where a minimum amount of local tax revenue came from the oil, coal or natural gas business, and which now have above-average unemployment.

Healthcare businesses like hospitals are in a good position to take advantage of the PTC. They can, for example, install solar panels on their facilities.

Investment Tax Credit

The Investment Tax Credit (ITC) is similar in many ways to the PTC. It provides an incentive for taxpayers to invest in certain clean energy projects. The credit is based on a percentage of up to 30% of the amount a taxpayer invests in:

    • A facility that produces clean energy; or
    • Technology used to store energy.

While healthcare businesses might be able to use the ITC, it is better suited for biotech. Life sciences companies have many opportunities to invest in clean energy technology.

R&D Credits

Healthcare and biotech organizations can claim tax credits equal to 25% of qualified research and development (R&D) expenditures. Qualified expenses may include:

    • Payroll;
    • Supplies; and
    • Use of third-party computer systems.

Software and medical device development may count as qualifying R&D for this purpose.

Other Issues for Healthcare and Biotech

Other bills passed in Congress also present issues for healthcare and biotech firms. Perhaps the most notable are changes made in 2022 to the provisions regarding research and experimental expenditure (R&E) capitalization.

Taxpayers may not deduct certain R&E expenses during the year they incur them. Instead, they must capitalize those expenses and amortize them over a period of years. Under the new rule, the amortization period is:

    • Five years for domestic research; and
    • Fifteen years for foreign research.

This could result in increases in taxable income for businesses that are not prepared.

Suppose a biotech firm spent $5 million on R&E during the most recent tax year. Rather than deducting the full $5 million that year, the firm must amortize it over five years. This means they may only deduct $1 million per year.

If you have any questions or would like additional information, please contact us.