WSGR ALERT

Federal Budget Suspends Medical Device Excise Tax for Two Years

December 22, 2015

The Patient Protection and Affordable Care Act's (ACA)1 2.3 percent medical device excise tax was contentious even before taking effect on January 1, 2013. Under the ACA, medical device manufacturers and importers are required to pay a 2.3 percent excise tax on sales of medical devices.2,3 Although a small group of medical devices were exempt (e.g., eye glasses, contact lenses, hearing aids, and certain other devices generally purchased by the public at retail for individual use),4 most devices remained subject to the excise tax. The tax has invoked strong objections, with some stakeholders arguing that the tax hit small and start-up medical device manufacturers unduly hard, cost jobs, and limited the development of new medical devices.

Two-Year Moratorium on Medical Device Excise Tax

The Consolidated Appropriations Act of 2016 (CAA),5 signed on December 18, 2015, by President Obama, suspends the 2.3 percent medical device excise tax beginning on January 1, 2016, with the suspension ending on December 31, 2017.6 This two-year moratorium is welcome news for medical device manufacturers and importers, especially for small medical device manufacturers and start-ups.

Increased National Institutes of Health (NIH) Funding

NIH funding will increase by $2 billion in fiscal year 2016. This is good news for universities and the start-ups that spin out of university research. The CAA includes funds for e.g., the trans-NIH Precision Medicine Initiative, human genome research, and a host of other research areas.

Suspension of "Cadillac Tax" on High Cost Employer-Sponsored Healthcare Plans

The ACA imposes a significant excise tax (40 percent of excess benefit) on high cost employer-sponsored health coverage.7 This tax is suspended until January 1, 2020.8 The CAA also revises certain tax provisions so the excise tax is considered a deductible business expense.9 Money saved from the suspension and tax-deductibility of the "Cadillac Tax" may, for example, be applied to research and development.

Research and Development Tax Credit for Small Companies

The CAA makes permanent certain research and development tax credits which had previously expired on December 31, 2014.10 The CAA also includes a tax credit provision permitting start-up companies and other small businesses to apply a portion of their R&D tax credit to reduce their payroll tax obligations.11 The payroll tax credit is only available to businesses with less than five years of gross receipts and with less than $5 million in gross receipts during each year. Qualifying companies may elect to apply up to $250,000 in R&D credits to their payroll tax obligations.12 This could be of significant help in reducing tax liabilities for small companies that have yet to turn a profit, and therefore could not otherwise use the traditional R&D tax credit.

Conclusion

The CAA suspends the medical device excise tax for two years. Whether the suspension becomes permanent will depend on many factors, including the state of the economy, the cost of the ACA, future congressional and senate make-up, and the outcome of the next presidential election. The CAA also reduces the tax liability for certain employers by delaying implementation of the "Cadillac Tax" on high cost employer-sponsored health care plans. It also makes permanent certain tax credits for research and development expenses that otherwise would have expired, and allows certain small businesses to apply a portion of these credits against their payroll tax liabilities. The savings from the CAA's tax deferral and credit provisions can be used elsewhere. Finally, the CAA's increased funding for NIH will result in additional new research—at least some of which may result in the spin out of start-ups from universities.

For questions regarding the CAA, please contact David Hoffmeister, Eileen Marshall, or any member of the life sciences or tax practices at Wilson Sonsini Goodrich & Rosati.

Charles Andres and Timothy Shapiro contributed to the preparation of this WSGR Alert.


1 Pub. L. No. 111-148, 124 Stat. 119 (2010); Pub. L. 111-152, 124 Stat. 1029 (2010); collectively the ACA.
2 Pub. L. 111-152, 124 Stat. 1029 (2010), Section 1405.
3 A "taxable medical device" is one that is listed as a device with the U.S. Food and Drug Administration (FDA) under Section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 C.F.R. part 807.
4 I.R.C. § 4191(b)(2); Treas. Reg. § 48.4191-2(b). See also "Medical Device Excise Tax: Frequently Asked Questions," IRS, Feb. 3, 2014, available electronically at: https://www.irs.gov/uac/Medical-Device-Excise-Tax:-Frequently-Asked-Questions, last accessed Dec. 21, 2015.
5 H.R. 2029. The CAA runs 887 pages and is partitioned into Divisions A-Q.
6 CAA, Division Q, Subtitle C, Part 2, Section 174.
7 I.R.C. § 4980I; Pub. L. No. 111-148, 124 Stat. 119 (2010), Section 9001.
8 CAA, Division P, Title I, Section 101.
9 CAA, Division P, Title I, Section 102.
10 CAA, Division Q, Subtitle A, Part 3, Section 121(a).
11 CAA, Division Q, Subtitle A, Part 3, Section 121(c).
12 Id.