President Obama signed the American Taxpayer Relief Act of 2012 (the Act) which freezes tax rates and retroactively reinstates certain business tax incentives that expired such as the research and development (R&D) tax credit for pharmaceutical and life sciences companies. This Alert provides guidance on accounting for the retroactive reinstatement of the R&D tax credit.
The American Taxpayer Relief Act of 2012 (the "Act"), signed into law by President Barack Obama on January 2, 2013, extends the section 41 research credit for two years retroactively from January 1, 2012, through December 31, 2013. (For discussion of other changes made by the Act, please see our 1/8/13 WNTS Insight). Significantly, the new law includes a provision, section 301(b), which resolves an issue regarding the treatment of qualified research expenditures ("QREs") in the event of an acquisition or disposition of a trade or business.
The highly acquisitive nature of the pharmaceutical and life sciences industry, driven primarily by the continued focus on existing product development and pipeline diversification as a result of patent expiration, funding challenges, and other factors, creates the need for such companies to ensure that the impact of this new provision has been considered, for existing and contemplated transactions, from both a federal tax and financial accounting perspective. (With regard to the financial accounting implications, please see our Pharmaceutical and Life Sciences Industry Alert, 2013-1).
More broadly, while the temporary extension of the credit eliminates, albeit temporarily, uncertainty as to the credit's existence, examination challenges as to the IRS's enforcement of the credit will continue, notwithstanding a recent initiative within the IRS to identify core research as it relates to the development of a compound (for further discussion of this initiative, please see our 12/11/12 Pharma and Life Science Tax News Alert).