One Big Beautiful Bill Act – Tax Implications for Life Sciences Industry

Passed by Congress on July 3, 2025, and signed into law by President Trump on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) 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 in this article are expected to have a 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 domestic research and experimental (R&E) expenditures over five years, and it 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 million), 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 five 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 OBBBA 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 sciences 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 up-front 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 US 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 US tax on eligible income and is generally intended to reduce US tax considerations for US corporations regarding where to locate property generating such income.

In determining the FDDEI deduction, OBBBA 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 OBBBA.

Before the OBBBA, 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 OBBBA 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 OBBBA 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 US company and a non-US 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, in which work will be performed for the non-US 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 Internal Revenue 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 OBBBA has substantially revised the rules relating to QSBS in a taxpayer-favorable manner.

The OBBBA expands eligibility to issue QSBS to incrementally larger corporations. For issuances occurring after the enactment of the OBBBA, 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 OBBBA). 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, as discussed in the Research and Experimental Expenditures (Sections 174 and 174A) section of this article. Other preexisting requirements for QSBS that are beyond the scope of this article remain in effect.

Pursuant to the OBBBA, 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) 10 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 used in full for QSBS sold after five years. For QSBS acquired after the enactment of the OBBBA, 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 prorated 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 OBBBA revisions further enhance the gain exclusion incentive, broaden its relevance to more corporations, and add flexibility to use a portion of the QSBS exclusion in earlier sale transactions. These changes may have choice of entity implications for startups and small businesses, including increasing the value of the planning and monitoring of QSBS status and, generally, the attractiveness of C corporations for many US businesses and US taxable investors.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.