Life Sciences and Biotech Firms Drawn to NYC by Tax CreditsBy Alan M. Blecher | October 22, 2021
Although the COVID-19 pandemic altered the demand for New York real estate, it also contributed to an increased demand for cutting-edge medical research. This trend helped fuel the recognition of life sciences as a “sub-industry” in commercial real estate.
Over the last several years we have seen an intensified investment – both public and private – in engineering a full ecosystem for life sciences to flourish. Venture capital funding of more than $1 billion in 2019 alone, combined with New York City’s public investment of $1 billion, has enabled the life sciences real estate sector to thrive as traditional office and retail properties have come under pressure from remote-working and social-distancing measures imposed during the pandemic. Moreover, given an aging population and a growing need for medical innovation, demand for life sciences real estate should continue unabated for the foreseeable future.
Companies seeking the opportunity to enter or expand their life sciences operations into the New York City area will encounter a welcoming tax environment. Federal and state tax credits and incentives – particularly those around R&D – are fueling an expanding real estate footprint for the industry.
Life Sciences Tax Incentives
For many companies in the life sciences and biotech industries, day-to-day operations can qualify for tax savings through the Research and Development (R&D) Tax Credit. A company that has worked to develop new or improved pharmaceuticals or medical devices, formulas or technology, may be eligible for federal and state R&D tax credits equaling up to 25% of qualified spending.
A life sciences company can benefit from R&D tax credits even if it is not paying income tax currently. This can happen if it has losses, and thus no tax liability against which to apply the credit. There may be opportunities to receive the value of the credit or to sell or transfer it for cash. Further, some federal and state tax credits may be carried back to earlier tax years, or forward to future tax years, when there is income.
A life sciences company is eligible for the R&D tax credits if it pays a variety of scientific, R&D or research employees or contractors to develop or improve its product, process or technology. Those employees include:
Analytical or formulations scientists
Clinical trial managers
Process or manufacturing chemists
R&D laboratory associates
Research informatics specialists
Discovery biology specialists
Drug discovery specialists
Additionally, a life sciences company is eligible for the R&D tax credits if it engages in qualifying activities, including:
Designing, formulating or developing new drugs and therapeutics, medical devices, drug delivery mechanisms or improved testing and analytical methods and procedures
Identifying molecular targets and indications
Testing therapeutic agents and applications
Performing long-term safety and pharmacovigilance studies
Researching drug-drug interactions and relative efficacy compared to other drugs
Investigating potential new indications and/or new patient populations for existing drugs
Automating processes using computer/data technology, AI or robotics, and creating prototypes or developing software
In addition to the R&D tax credits discussed above, there is another significant tax credit equal to 25% of qualified clinical testing expenses – the Orphan Drug Credit (ODC). The ODC is a federal tax credit that incentivizes pharmaceutical companies to develop medications and treatments for rare diseases. The credit is designed to help pharmaceutical companies lower their developmental costs and is available to life sciences companies that perform clinical testing on orphan drugs before the date of FDA approval. Qualified expenses include wages, supplies used during clinical trials, and payments to contract research organizations or contracted individuals. The company’s efforts do not have to succeed to qualify for the tax credit. Attempts to develop incremental, evolutionary product and process improvements are eligible, as well.
State Tax Credits
State tax credits add further tax incentives for qualified life sciences companies. For example, the New York State Life Sciences Research and Development Tax Credit Program is designed to support new life sciences businesses locating, inventing, commercializing and producing in New York State.
The program is available to a new business that devotes the majority of its efforts to the various stages of research, development, technology transfer and commercialization related to any life sciences field.
Qualified life sciences companies may be eligible to receive a fully refundable credit based on qualified R&D expenditures incurred in New York State. The credit is 15% for a company that employs 10 or more people and 20% for a company that employs fewer than 10. The credit is allowed for up to three consecutive years beginning with the first taxable year on or after January 1, 2018, during which the life sciences company meets the eligibility criteria. The credit is capped at $500,000 per year, with a lifetime cap of $1.5 million.
Life sciences companies looking to make a move into New York have many options to capitalize on the life sciences real estate environment. To review your options, or if you have any questions, please contact Alan M. Blecher, JD, Principal at Marks Paneth LLP, or your Marks Paneth advisor.
About Alan M. Blecher
Alan M. Blecher, JD, is a Principal at Marks Paneth LLP. Mr. Blecher has considerable experience serving high-income and high-net-worth individuals and their closely held businesses. He focuses especially on partnerships, limited liability companies and S corporations. He has been in public accounting since 1985 and has been involved in tax planning for numerous transactions. These include transactions involving public debt offerings, sales of family businesses and restructurings of distressed entities, among others. Mr. Blecher... READ MORE +