Washington, DC (September 27, 2018) – The Biotechnology Innovation Organization (BIO) today applauded the House of Representatives for passing the American Innovation Act of 2018 (H.R. 6756), 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.
“The American Innovation Act’s reform of net operating loss limitations will foster more investment, economic growth, job creation, and continued American leadership in biopharmaceutical and bio-based technology innovation,” said BIO President and CEO Jim Greenwood. ”I applaud the House of Representatives for passing this important legislation, and I thank Chairman Brady, Congressmen Paulsen and Buchanan, and their colleagues on the House Ways & Means Committee for their leadership in advancing this welcome reform.”
Background
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.