Stimulating the Life Sciences Industry
New incentives in place at the federal as well as state and local levels will help to stimulate growth of life sciences companies and affect their location and investment decisions.
Biotech Location Guide 2009
The new executive order will allow research projects to be eligible for federal funding and will also bring this research under the National Institutes of Health (NIH) oversight. (Currently, privately funded embryonic stem cell research is not subject to any government oversight.) While signing the executive order, President Obama said, "We will never undertake this research lightly. We will develop strict guidelines, which we will rigorously enforce, because we cannot ever tolerate misuse or abuse." Under the new executive order, life sciences companies, researchers, and scientists will now have the ability to receive federal funding to help advance their studies and better understand the treatments for heart disease, Alzheimer's, Parkinson's, leukemia, various cancers, and diabetes.
Because of the industry's costly, research-intensive nature, development tends to be concentrated in large urban areas that are home to universities and research institutions, well-educated work forces, and healthy entrepreneurial and venture capital markets. These criteria have made the Unites States the primary location for the biotech marketplace. Scientific research and economic development are complementary. With the ban on federal funding for stem cell research being lifted, the United States will experience yet another boost from an economic development perspective as more life sciences companies, researchers, and scientists receive the federal funding they so desperately needed to move their research initiatives forward.
The R&D Tax Credit
Over the past 25 years, one of the most important economic development incentives in the United States for life sciences companies and research-intensive firms has been the Research and Development Tax Credit (R&D Tax Credit). The R&D Tax Credit provides companies with an effective and proven incentive to increase their R&D spending in the United States. Since the credit was established in 1981, investments in R&D have spurred unparalleled economic growth in the life sciences industry.
On October 3, 2008 the U.S. Congress passed the Emergency Economic Stabilization Act of 2008 (EESA). As part of EESA, Congress extended the R&D Tax Credit through 2009. This extension applies to U.S. R&D activity for tax years 2008 and 2009. The R&D Tax Credit induces billions of dollars of U.S. economic activity and keeps thousands of highly skilled and high-paying jobs in the United States.
However, the extension of the R&D Tax Credit is just a temporary step in the promotion of research and development activity in the United States. In order for this incentive to have a long-term and sustained impact on the U.S. economy and assist with the siting of large R&D investments, the credit needs to be strengthened and be made permanent.
In addition to extending the R&D Tax Credit through 2009, Congress made two major changes to the program. The extension terminated the Alternative Incremental Credit (AIC) at the end of the 2008 tax year, and it increased the Alternative Simplified Credit (ASC) from 12 percent to 14 percent in 2009. The AIC had an extremely confusing calculation method that could only be used in the current year, and companies could not go back and amend tax returns and use the AIC. The ASC is much easier to calculate and allows companies to use this method if they cannot calculate their base percentage or if their base percentage is too high. Small to mid-size life sciences companies will most likely opt to use the ASC in 2009.
The 2009 Stimulus Bill
The real federal incentive boon for life sciences companies comes in the form of the American Recovery and Reinvestment Act (ARRA) of 2009 otherwise known as the "2009 Stimulus Bill." The ARRA will have a significant impact on companies making decisions on capital investments and specifically affects a number of business incentives that could impact the life sciences industry. In particular, ARRA extends current incentives and creates a variety of new incentives for life sciences companies. Several measures are highlighted below:
Bonus Depreciation: The Stimulus Bill extends a temporary benefit for capital expenditures incurred in 2009. Specifically, the provision allows businesses to recover the costs of capital expenditures made in 2009 faster by permitting these businesses to immediately write off 50 percent of the cost of depreciable property. Alternative Minimum Tax (AMT) and loss taxpayers may receive 20 percent of the value of their old AMT or R&D tax credits, provided that taxpayers invest in assets that qualify for bonus depreciation. The amount is capped at the lesser of 6 percent of outstanding and unused AMT and R&D tax credits or $30 million.
Production Tax Credit: The bill extends and modifies the renewable energy Production Tax Credit. Specifically, the provision extends the placed-in-service date for wind facilities for three years (through 12/31/12). The bill also extends the placed-in-service date for three years (through 12/31/13) for certain other qualifying facilities including closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities.
Investment Tax Credit (ITC) in lieu of the Production Tax Credit (PTC): Qualified renewable facilities can now elect to claim the Investment Tax Credit in lieu of the Production Tax Credit. Property eligible for the credit is tangible personal or other tangible property. Depreciation or amortization is allowable only if the property is used as an integral part of the qualified facility.
Treasury Department Energy Grants in Lieu of Tax Credits: The bill allows taxpayers to receive a grant from the Treasury Department in lieu of tax credits. The grant will operate like the current-law Investment Tax Credit, and the Treasury Department will issue a grant in an amount equal to 30 percent of the cost of the renewable energy facility within 60 days of the facility being placed in service.
Modification of the Business Energy Credit: The cap on small wind energy property has been eliminated and the basis reduction for subsidized energy financing has been repealed.
Advanced Energy Investment Credit: The bill creates a new 30 percent Investment Tax Credit for facilities engaged in the manufacture of advanced energy property. Credits are available only for projects certified by the Secretary of Treasury, in consultation with the Secretary of Energy, through a competitive bidding process. The Treasury may allocate up to $2.3 billion in credits. Advanced energy property includes technology for the production of renewable energy, energy storage, energy conservation, efficient transmission and distribution of electricity, and carbon capture and sequestration.
Credit for Carbon Dioxide Sequestration: A $10 per metric ton credit is allowed for the sequestering of carbon dioxide through permanent geologic storage.
Clean Renewable Energy Bonds (CREB): The bill authorizes an additional $1.6 billion of CREBs to finance facilities that generate renewable energy. Qualified renewable sources include wind, closed- and open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewables, and trash combustion.
Qualified Energy Conservation Bonds: The bill authorizes an additional $2.4 billion of qualified Energy Conservation Bonds to finance certain energy conservation programs and initiatives.
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