INSIGHT

Navigating new challenges: How tariffs, taxes, and R&D regulations are reshaping Biotech 

Sarah Weaver, Rono Ghosh, Andre Shevchuck • April 3, 2025

Services: R&D Tax Credit, Corporate Tax Industries: Life Science

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The biotech industry faces a shifting landscape of regulations and policies that are transforming how companies operate. From international trade barriers to complex tax changes, understanding the key effects and possible mitigation approaches is critical for business planning and sustainability.  Let’s examine how recent legislative shifts affect biotech organizations of all sizes and what strategies might help navigate these changes. 

New tariffs reshaping global supply chains 

The introduction of significant tariffs on imports from Canada and Mexico (25% each) and China (10%) is creating ripple effects throughout biotech supply chains. It’s worth noting that tariffs on Canadian and Mexican goods were postponed until March 4, 2025. While these changes affect all biotech companies, smaller organizations with limited cash reserves are particularly vulnerable despite potentially dealing with lower volumes. 

These tariffs create a dual challenge for biotech firms: 

• First, many biotech companies depend on materials and components from these countries—especially China, which has traditionally offered cost-effective pharmaceutical production supplies. 
• Second, reciprocal tariffs imposed by these nations will hamper U.S. companies’ ability to export products, even for those who source materials domestically. This creates a complex situation where both imports and exports are affected. 

Larger and more established biotech firms have been taking proactive measures by diversifying suppliers and revising contractual arrangements. Some have already shifted away from Chinese contract manufacturing organizations (CMOs) and updated their insurance provisions. However, smaller and emerging biotech companies typically lack the resources for such preemptive actions, leaving them more exposed to these trade pressures. Industry analysts anticipate these changes will contribute to broader price increases across biotech and pharmaceutical products. 

The effects go beyond direct production costs. Companies now need to consider restructuring their global operations, reassessing strategic partnerships, and potentially relocating certain activities to reduce tariff exposure. This reorganization demands significant investment in new supply chain infrastructure and relationship development with alternative suppliers—adding financial pressure to an industry already characterized by substantial development costs. 

Evolving corporate tax environment 

The corporate tax landscape is undergoing notable changes under the current administration. While there are proposals to lower corporate tax rates, particularly for companies that manufacture within the United States, these potential benefits come with increased compliance complexity and reporting requirements. The administration has signaled preferences for domestic manufacturing, potentially offering more advantageous deductions and accelerated depreciation calculations. 

Tax professionals have observed that international tax compliance has become considerably more complex recently, with forms such as Form 5471 growing substantially in scope and intricacy. This expanded reporting obligation has resulted in higher compliance costs and more complicated tax provision work for biotech organizations. 

Furthermore, the administration has proposed additional penalties—sometimes labeled as “tariffs” but functioning as penalty taxes—on U.S. companies that offshore certain operations. This could specifically affect biotech companies conducting R&D overseas to leverage foreign tax credits or cost efficiencies, with potential additional taxes of 5-10 percent beyond the standard corporate rate. These penalties specifically target companies conducting activities outside the U.S., creating additional considerations for biotech firms with global operations. 

Section 174 and the capitalization of R&D expenses 

Perhaps the most substantial tax change affecting the biotech sector is the Section 174 requirement to capitalize R&D expenses, which took effect in 2022. Despite widespread anticipation of legislative adjustments and bipartisan support for changes, the requirement remains active, with potential modifications not expected until 2026. This provision has created particular difficulties for research-intensive organizations in the biotech field. 

Under these rules, companies must capitalize and amortize R&D expenses over five years for domestic spending and fifteen years for foreign spending, rather than deducting them immediately. This creates an especially challenging situation for biotech startups, where R&D typically constitutes the majority of operating expenses. The impact is particularly severe for pre-revenue companies that rely on federal grants for R&D funding, as they may face tax liabilities without revenue streams to cover them. 

The effects have been substantial: companies showing losses on their financial statements may still face tax obligations due to the timing difference between financial and tax accounting for R&D expenses. This situation becomes especially pronounced when companies receive collaboration deals, as revenue recognition for tax purposes typically occurs earlier than for financial reporting. Many startup companies have been surprised to find themselves in taxable positions despite considering themselves pre-revenue organizations. 

Recent discussions suggest that potential future adjustments might only address domestic R&D spending, leaving the 15-year amortization requirement in place for foreign R&D activities. This would continue to affect many startups that rely on offshore third parties for clinical trials and other research activities. 

Strategic Considerations for Biotech Companies 

1. Supply chain restructuring: Companies should evaluate their supply networks and consider diversifying sources to mitigate tariff impacts, weighing the costs and benefits of domestic versus international suppliers. This includes assessing alternative providers, considering geographical diversification, and potentially restructuring existing supplier relationships to optimize costs and minimize tariff exposure. 

2. Proactive tax planning: Early involvement of tax advisors in collaboration agreements and business development deals can help structure revenue recognition more favorably for tax purposes. Companies should focus particularly on documentation and analysis to ensure accurate Section 174 calculations and avoid overstating capitalized amounts. 

3. R&D location strategy: Organizations should carefully evaluate the location and structure of their R&D activities, considering the differential treatment of domestic versus foreign research expenses. This may involve reassessing the balance between internal and external research activities and the geographical distribution of research operations. 

4. Enhanced compliance preparation: Companies need to prepare for increased complexity in tax reporting and potentially higher compliance costs. This includes developing robust systems for tracking and documenting R&D expenses, maintaining detailed records of international transactions, and ensuring adequate resources for enhanced reporting requirements. 

5. Integrated strategic planning: Organizations should consider these tax and tariff implications early in their business planning processes, particularly when structuring collaborative agreements, planning research activities, or expanding operations internationally. 

While tax considerations shouldn’t drive business decisions, they have become increasingly important factors in strategic planning. Companies that address these challenges proactively while maintaining focus on their core mission of innovation and development will be better positioned to thrive in this evolving regulatory landscape. 

How BPM can support your Biotech organization 

At BPM, we understand the unique challenges biotech companies face in navigating today’s complex regulatory and tax landscape. With experience supporting organizations across the life sciences sector, from early-stage startups to established pharmaceutical firms, we provide guidance that helps manage compliance requirements while pursuing innovation goals. 

Contact BPM today to discuss how we can support your organization’s strategic objectives.