Medical device companies can now take advantage of the much-anticipated suspension of the medical device tax and the move to make the R&D credit permanent for small businesses, both of which have the potential for a major impact on the medical device industry and investors. The recent passing of the Consolidated Appropriations Act of 2016 (the "CAA") provides a wide range of new tax benefits to both individuals and businesses.

Two-Year Suspension of Medical Device Excise Tax

The Patient Protection and Affordable Care Act (the "ACA") included a 2.3 percent excise tax on sales of medical devices. The tax became effective January 1, 2013. Although there were some exceptions (such as hearing aids, eye glasses, and contact lenses), most devices remained subject to the tax. The tax has been the subject of strong opposition from the medical technology industry since it was enacted.

The CAA suspends the 2.3 percent excise tax from January 1, 2016 to December 31, 2017. This two-year suspension is welcome news, although many parties still aim to repeal the tax entirely. Whether there may be permanent repeal of the tax at a later date will depend on a variety of factors, including the outcome of the upcoming presidential election.

Permanent R&D Tax Credit and Additional Benefit for Start-Ups

Certain research and development tax credits expired on December 31, 2014. The CAA removed the expiration date, making the credits permanent and available retroactively. In addition, "small businesses" are eligible to apply a portion of the R&D credit to payroll tax obligations instead of income tax obligations. This new provision is a significant benefit for start-up businesses that aren't able to use the traditional R&D income tax credit because they have not yet turned a profit.

A qualifying small business must have less than five years of gross receipts and less than $5 million in gross receipts per year. If a business qualifies, it can elect to apply up to $250,000 in R&D credits to payroll tax obligations.

Next Steps for Businesses

Businesses that have already set aside funds for the payment of taxes that have been delayed could use those funds for other purposes. Increased certainty resulting from permanence of tax credits will also allow businesses to better plan their spending, without waiting for last-minute results from Congress.

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