How Life Sciences May Be Affected by New Administration Tax Policies

In this article:

1. The Qualified Small Business Stock Exemption
2. Research and Development (R&D) Costs
3. Preservation of Tax Attributes for Startup Companies
4. M&A and Beyond
5. Pass-Through Entity (PTE) Tax Structure
6. Bonus Depreciation Phase-Out and Capital Expenditure Planning
7. Optimize Your Tax Position

For clients in the life sciences, tax policies often hinge on a shifting political landscape. This means, each new administration may signal changes that could reshape strategies in the coming year and beyond. Understanding emerging policies will be key in 2025 for areas like M&A timing, R&D cost management, and structuring for pass-through tax benefits.

The Qualified Small Business Stock Exemption

For life sciences companies structured as C-corporations, the Qualified Small Business Stock (QSBS) exemption allows shareholders to avoid taxes on stock sale gains, up to $10 million or 10 times the adjusted basis. This 100-percent exemption along with the current 21 percent corporate tax rate makes C-corp status an attractive option, especially for firms planning substantial growth or an exit strategy.

Reviewing your corporate structure now could reveal valuable opportunities. For many, maintaining or converting to a C-corp offers tax advantages that maximize gains while keeping tax rates well below the individual top rate. These benefits make C-corp status worth considering as part of your long-term planning.

Research and Development (R&D) Costs

Changes to tax rules that became effective in 2022 require the capitalization of R&D expenses instead of deducting them immediately. Prior to 2022, companies had the option to deduct expenses as incurred or to amortize them over 5- or 10-year periods, depending on their individual facts and circumstances.

Since many in the life sciences often depend on R&D to stay competitive, the resulting tax liabilities may disrupt cash flow due to the conversion of financial statement losses into taxable income. Careful tax planning can help offset these costs. Exploring available tax strategies will be key—especially as potential legislative changes remain under discussion with the new administration, including the potential to restore pre-2022 rules in one form or another.

Preservation of Tax Attributes for Startup Companies

Many life science companies rely on outside funding from third-party investors to develop, test, and obtain governmental approval to manufacture their products and compounds. During this period, which can take multiple years, it is common for companies to continually issue additional shares to both new and existing investors.

U.S. tax law includes provisions that limit a company’s ability to fully preserve its tax attributes, such as net operating loss or credit carryovers, if stock ownership changes by more than 50 percent during a three-year period. Given the ongoing need for life sciences and other technology-driven industries to secure capital, there is considerable potential for these sectors to be affected as they attract new investments.

While there are strategies for minimizing the amount of limited loss or credit carryovers, such as capitalizing costs and otherwise deferring deductions where allowable, the most important thing a startup company can do is to closely review their cap table with their tax advisors to watch for a potential ownership change. This is a question that investors frequently analyze during the due diligence review of a company’s financial position, and it is often a material factor in determining the timing of a capital raise.

M&A and Beyond

In certain cases, companies may prefer an outright sale of its stock or assets to an unrelated buyer due to a combination of additional research support or the freedom for executives to devote their time to research rather than fundraising. With the corporate tax rate likely to remain steady through 2025, now may be an ideal time to finalize deals and optimize tax timing. Several factors suggest strong M&A activity in 2025. As private equity investors target biotech and similar sectors, steady tax rates, possible interest rate declines, and a wave of retiring business owners may all drive deal volume higher. For life science firms preparing for acquisition, strategic planning now could help founders and investors maximize after-tax proceeds.

Additionally, with potential easing of Justice Department restrictions on larger deals, companies operating nationally may have more options. For business owners, this could create valuable opportunities to time transactions and optimize tax outcomes in a shifting market.

Pass-Through Entity (PTE) Tax Structure

If your company is organized as a partnership or S corporation, the Pass-Through Entity (PTE) tax structure lets you deduct state and local taxes (SALT) at the entity level, bypassing the $10,000 cap on individual SALT deductions. This structure can help business owners in high-tax states claim deductions that might otherwise be out of reach. For smaller life sciences firms set up as pass-through entities, this approach may result in substantial tax savings, increasing the after-tax income you can reinvest in growth.

Bonus Depreciation Phase-Out and Capital Expenditure Planning

As bonus depreciation phases out, life science firms in capital-intensive areas face higher upfront tax costs on equipment and facility investments, since immediate deductions are no longer available. If you’re planning significant infrastructure or technology upgrades, consider timing your purchases strategically to maximize tax savings under current rules. Staying informed on potential legislative changes could also open opportunities for future deductions if bonus depreciation is reinstated.

Optimize Your Tax Position

AAFCPAs supports the growth of life science firms at every stage, from early startup through IPO and beyond. We offer specialized accounting, tax, and advisory services tailored to your area of expertise including biotech, digital health, medical device, and related fields. AAFCPAs helps clients navigate industry complexities like multistate tax, revenue recognition, and venture-backed equity structures.

We offer integrated solutions and tax strategies to maximize savings along with fractional CFO support, transactional accounting, wealth advisory, business process and IT consulting, and buy- and sell-side M&A assistance. For clients entering new markets or preparing for public offering, AAFCPAs brings the regulatory insight and national reach needed to meet industry and compliance demands. Our affiliation with PrimeGlobal further connects clients to trusted, international resources when needed, helping you address complex global challenges with confidence.

If you have questions, please contact Richard Weiner, CPA, MST, CM&AA, Tax Partner at 774.512.4078 or rweiner@nullaafcpa.com—or your AAFCPAs Partner.