Medtech makers say law change on R&D expenses hurts patients, innovation

This year marks the first time in nearly 70 years companies won't be able to claim all expenses for research and development in the same tax year that the money was spent.

Many medtech and life sciences companies object to the change, arguing it could hurt innovation and thereby slow development of life-saving or life-changing products. That's detrimental, they say, for an industry like medical technology built around an endless quest to find the next big breakthrough for treatment and care.

Under previous tax law, companies could expense all R&D costs spent that year on the same year's taxes. The new law however requires those costs be amortized over five years. That translates into smaller numbers expensed each year. This law change was a provision, just now going into effect, from the 2017 tax reform legislation.

Companies want the previous rules reinstated.

"R&D costs in the medtech space are a significant component every year. We're not just talking about concepts around innovation but paying the salaries of researchers and scientists who spend their efforts every day to try and find either newer and better technology related to the existing products or innovate new products," said David Green, managing partner of Deloitte's life sciences and health care tax practice, in an interview.

"This will have a material impact on the cash flows of the medtech companies that are engaged in this research," Green said.

According to the Medical Device Manufacturers Association (MDMA), "The inability to immediately write-off R&D expenses will make investments more costly to smaller U.S. medical technology companies, or cause them to halt investments altogether."

Three trade groups — MDMA, the Advanced Medical Technology Association (AdvaMed) and the Medical Technology & Imaging Alliance — sent a letter to Congress in March to make their case. Many companies and organizations, including Minnesota's Medical Alley organization, signed on to the letter.

Medtronic spent $2.5 billion on R&D in its fiscal 2021 — about 8.3% of its overall revenue of $30.1 billion.

"Medtronic supports the efforts to restore the deduction of R&D expenses in the year they were made and is aligned with AdvaMed in their signing of the letter," Erika Winkels, a spokeswoman for the company, said in an email.

The issue applies to any company in any industry — such as nonmedical manufacturing and consumer technology — that does research and development work.

Bipartisan bills aimed at restoring "immediate expensing" have been introduced in the U.S. Senate and the U.S. House. The Senate version has 27 co-sponsors. The House version has 100 co-sponsors. No members of the Minnesota congressional delegation are co-sponsoring either of the bills.

Boston Scientific Corp. also signed the letter to Congress. Although based in Massachusetts, the company has more than 10,000 employees in Minnesota.

"Boston Scientific invests more than $1 billion annually in R&D, and our success as well as our industry's is grounded in our collective ability to invest in life-changing innovation," said Kate Haranis, a spokeswoman for Boston Scientific, in an email.

"Rather than stimulating continued growth, this change in R&D tax policy undermines the industry's ability to make critical investments in life-sustaining therapies and the creation of new jobs."