On July 3, 2025 Congress passed, and on July 4, 2025 President Trump signed into law, the One Big Beautiful Bill Act (OBBB), which extends various expiring tax provisions from the Tax Cuts and Jobs Act and introduces a variety of other substantial tax law changes. The developments highlighted below are expected to have particular impact on life sciences transactions and business operations.
Research and Experimental Expenditures (Sections 174 and 174A)
New Section 174A no longer requires taxpayers to capitalize and amortize over five years domestic research and experimental (R&E) expenditures and instead allows taxpayers to immediately deduct such expenses for tax years beginning after December 31, 2024. In the case of eligible small business taxpayers (generally having average annual gross receipts during the preceding three taxable years not in excess of $31,000,000), R&E expenditures may retroactively be expensed for taxable years beginning after December 31, 2021 by filing amended returns. All other taxpayers that are amortizing R&E expenditures incurred in a taxable year beginning after December 31, 2021 and before January 1, 2025 may elect to accelerate the remaining unamortized amounts of such R&E expenditures over a one or two year period. An election to capitalize R&E expenses and amortize over 5 or 10 years is still available, although we expect it to remain rarely used outside of particular planning.
Foreign R&E expenditures must continue to be capitalized and amortized over 15 years under section 174. The OBBB clarifies that no deduction or reduction to amount realized is allowed with respect to the disposition, retirement, or abandonment of property after May 12, 2025 with respect to which R&E expenditures were incurred and are being amortized.
This distinction between domestic and foreign expenditures reflects a continued policy focus on incentivizing domestic R&E activity.
Business Implications
Since 2022, life science companies have faced significant challenges in structuring collaboration and non-dilutive transactions in a manner that would avoid a significant tax expense in connection with large upfront payments intended to be used to support multiyear research programs. It has become not uncommon for companies to be significant taxpayers in the first year of these transactions only to generate losses in subsequent years. This change in law will restore the status quo prior to 2022 with respect to domestic expenditures. Companies should be careful in understanding the geographic allocation of their spend and consider requirements with any third-party service providers that will satisfy the domestic expenditure requirements. Taxpayers that have been taxpayers as a result of R&E capitalization should review prior year tax returns to determine their eligibility for refunds under the new provision for small businesses.
Foreign-Derived Deduction Eligible Income (Section 250)
In relevant part, Section 250 allows U.S. corporations to take a deduction with respect to foreign-derived deduction eligible income (FDDEI) (formerly known under prior law as foreign derived intangible income or FDII). The deduction for FDDEI reduces the rate of U.S. tax on eligible income, and is generally intended to reduce U.S. tax considerations for U.S. corporations regarding where to locate property generating such income.
In determining the FDDEI deduction, OBBB no longer permits corporations to include as deduction eligible income, except as otherwise provided by the Treasury Secretary, income or gain from the sale or disposition of (i) intangible property, as defined in section 367(d) (which covers a broad range of intangible property), or ii) any other type of property that is subject to depreciation, amortization, or depletion by the seller. The effect of this change will be to decrease the FDDEI deduction for taxpayers with those categories of income now excluded under the OBBB.
Before the OBBB, the deduction was equal to 37.5% of FDII, although this percentage was scheduled to decrease under prior law for tax years starting after 2025. The OBBB decreases the FDDEI deduction to 33.34%, resulting in an effective tax rate of 14% on this income. However, the FDDEI deduction was set to decline by a larger amount and so the OBBB mitigates the rate reduction previously set to take effect. In addition, the amount of FDDEI income will no longer be reduced by a percentage of the company’s qualified business asset investment, which should increase the FDDEI deduction benefit when available.
Business Implications
Typical licensing transactions between a U.S. company and a non-U.S. licensee, which included the transfer of all substantial rights in the intellectual property, generated income giving rise to FDII deductions under prior law. These types of transactions will no longer generate deductions under section 250. Note that many of these transactions involve a service component where work will be performed for the non-U.S. licensee as part of the license transaction. We believe these amounts attributable to the service component should still qualify for the deduction under Section 250. Care should be taken in documentation to support the continued position. Furthermore, complex transactions that involve the transfer of less than substantially all rights with respect to a foreign jurisdiction (including those with licensee optionality as to target selection) are expected to continue to qualify for the deduction under Section 250.
Qualified Small Business Stock (Section 1202)
Section 1202 of the Code provides for the exclusion of up to 100% of gain from the sale or exchange of Qualified Small Business Stock (QSBS) held for at least five years. The OBBB has substantially revised the rules relating to QSBS in a taxpayer favorable manner.
The OBBB expands eligibility to issue QSBS to incrementally larger corporations. For issuances occurring after the enactment of the OBBB, to qualify as QSBS stock must generally be acquired by the taxpayer in its original issuance from a domestic C corporation that has aggregate gross assets of $75 million or less, thereafter indexed for inflation (an increase from the cap of $50 million or less, which remains applicable for issuances that occurred prior to the enactment of the OBBB). Note that these limits are determined based upon the tax basis of the company’s assets, which may be reduced more quickly as a result of the capitalization rule changes under Section 174, discussed above. Other preexisting requirements for QSBS remain in effect which are beyond the scope of this article.
Pursuant to the OBBB, for QSBS acquired after its date of enactment, there is an exclusion from gain on the disposition of QSBS of a particular corporation generally equal to the greater of i) $15 million per shareholder in the aggregate for current and prior years, adjusted for inflation (an increase from $10 million with respect to QSBS acquired before its enactment), or ii) ten times the taxpayer’s aggregate adjusted basis in the QSBS issued by the particular corporation and disposed of by the taxpayer during the year.
The gain exclusion may be utilized in full for QSBS sold after five years. For QSBS acquired after the enactment of the OBBB, there is now partial exclusion treatment available at shorter holding periods (with a 28% tax rate applicable to gain from the sale of QSBS, along with pro rated 3.8% Medicare tax on net investment income); for sales of QSBS occurring after three years the seller is entitled to a 50% gain exclusion (for an effective tax rate of 15.9%), and for sales of QSBS occurring after four years the seller is entitled to a 75% gain exclusion (for an effective tax rate of 7.95%).
Business Implications
The OBBB revisions further enhance the gain exclusion incentive, broaden its relevance to more corporations, and add flexibility to utilize a portion of the QSBS exclusion in earlier sale transactions. These changes may have choice of entity implications for start-up and small businesses, increase the value of planning into and monitoring QSBS status, and generally increase the attractiveness of C corporations for many U.S. businesses and U.S. taxable investors.
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