BIO Applauds Inclusion of Pro-Growth Provisions in Tax and Oversight Legislation
Washington, DC (November 28, 2018) – This week, the House of Representatives plans to take up a tax and oversight package (H.R. 88) which includes a provision that would protect investments in start-ups from inadvertently triggering the net operating loss (NOL) limitations under Section 382 of the tax code. R&D-intensive biotech start-ups frequently accumulate substantial NOLs in their early, pre-revenue years, given their typical reliance on investor capital for more than a decade before realizing any product revenue.
BIO President and CEO Jim Greenwood issued the following statement regarding the legislation:
"I applaud Chairman Brady and his colleagues on the House Ways & Means Committee for recognizing the unintended consequences faced by far too many small business innovators today due to NOL limitations. This bill would permit capital-intensive start-ups such as biotechnology firms to conduct multiple fundraising rounds without jeopardizing the value of their accumulated net operating losses – a reform that will foster more investment, economic growth, job creation, and continued American leadership in biopharmaceutical and bio-based technology innovation.
“This legislation also extends tax credits for advanced biofuels while the industry is at a critical stage of its development. Advanced biofuel tax credits enable companies in the field to make great strides in reducing the cost of production and developing first-of-a-kind technologies to deploy sustainable, low carbon, domestic biofuels.
“We urge the House of Representatives to pass this pro-growth legislation that will spur investment in emerging biotechnology innovators.”
Tax rules relating to the treatment of losses can unintentionally punish start-ups for investing in the growth of their companies. The rules, in Section 382 of the tax code, were written in the mid-1980s with the intent of preventing loss trafficking, or the strategy of companies acquiring failing firms with enormous losses on their books for the sole purpose of using the tax losses to offset other unrelated income. While we recognize the importance of preventing abusive loss trafficking, the application of these rules has created an impediment for start-ups which depend on investment capital and often accumulate NOLs as a result of substantial R&D expenditures and rapid hiring. Under Section 382, accepting these critical equity investments can limit a start-up’s ability to utilize its NOLs in the future. Thus, Section 382 discourages investment in innovation and works at cross purposes with tax policy that generally seeks to encourage R&D, such as the R&D credit.
Congress can foster economic growth and job creation without creating a new tax expenditure, simply by modernizing the rules in the code to stop penalizing start-ups for investing in job creation and innovation. Industries such as biotech can take over a decade to bring a product to market. To help companies in this development phase, Congress should create a long-term safe harbor from Section 382 NOL limitations (and related Section 383 credit limitations) for start-ups going through viable fundraising rounds.