Exception from passive loss rules for investments in specified medical research small business pass-thru entities

(a)

In general

Subsection (c) of section 469 of the Internal Revenue Code of 1986 is amended by redesignating paragraphs (4) through (7) as paragraphs (5) through (8), respectively, and by inserting after paragraph (3) the following new paragraph:

(4)

Specified medical research activities

(A)

In general

The term passive activity shall not include any qualified medical research activity of the taxpayer carried on by a specified medical research small business pass-thru entity.(B)

Treatment of losses and deductions

(i)

In general

Losses or deductions of a taxpayer in connection with qualified medical research activities carried on by a specified medical research small business pass-thru entity shall not be treated as losses or deductions, respectively, from a passive activity except as provided in clause (ii) and subparagraph (C).(ii)

Limitation

Clause (i) shall apply to losses and deductions of a taxpayer in connection with a specified medical small business pass-thru entity for a taxable year only to the extent that the aggregate losses and deductions of the taxpayer in connection with qualified medical research activities of such entity for such taxable year do not exceed the portion of the taxpayer’s adjusted basis in the taxpayer’s ownership interest in such entity that is attributable to money or other property contributed—(I)in exchange for such ownership interest, and(II)specifically for use in connection with qualified medical research activities.

For purposes of the preceding sentence, the taxpayer’s basis shall not include any portion of such basis which is attributable to an increase in a partner’s share of the liabilities of a partnership that is considered under section 752(a) as a contribution of money.

(C)

Treatment of carryovers

Subparagraph (B)(i) shall not apply to the portion of any loss or deduction that is carried over under subsection (b) into a taxable year other than the taxable year in which such loss or deduction arose.(D)

Qualified medical research activity

For purposes of this paragraph, the term qualified medical research activity means any qualified research (within the meaning of section 41(d)) with respect to qualified countermeasures (as defined in section 319F–1(a)(2) of the Public Health Service Act (42 U.S.C. 247d–6a(a)(2)). (E)

Specified medical research small business pass-thru entity

For purposes of this paragraph, the term specified medical research small business pass-thru entity means any domestic pass-thru entity for any taxable year if—(i)more than 80 percent of such entity’s expenditures on qualified research for such taxable year are paid or incurred in connection with qualified medical research activities, and(ii)the gross receipts (as determined under the rules of section 41(h)(3)) of such entity for the taxable year (and each preceding taxable year) is less than $1,000,000. (F)

Capital expenditures taken into account for expenditures test

An expenditure shall not fail to be taken into account under subparagraph (E)(i) merely because such expenditure is chargeable to capital account.(G)

Pass-thru entity

For purposes of this paragraph, the term pass-thru entity means any partnership, S corporation, or other entity identified by the Secretary as a pass-thru entity for purposes of this paragraph.(H)

Aggregation rules

(i)

In general

All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (m) or (o) of section 414, shall be treated as a single entity for purposes of subparagraphs (E) and (F)(iii).(ii)

Limitation where entity would not qualify

No entity shall be treated as a specified medical research small business pass-thru entity unless such entity qualifies as such both with and without the application of clause (i).

(b)

Material participation not required

Paragraph (5) of section 469(c) of the Internal Revenue Code of 1986, as redesignated by subsection (a), is amended by striking and (3) in the heading and text and inserting , (3), and (4).(c)

Certain research-Related deductions and credits of specified medical research small business pass-Thru entities allowed for purposes of determining alternative minimum tax

(1)

Deduction for research and experimental expenditures

Paragraph (2) of section 56(b) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

(D)

Exception for specified medical research small business pass-thru entities

In the case of a specified medical research small business pass-thru entity (as defined in section 469(c)(4)), this paragraph shall not apply to any amount allowable as a deduction under section 174(a).

(2)

Allowance of certain research-related credits

Subparagraph (B) of section 38(c)(4) of such Code is amended by redesignating clauses (ii) through (xii) as clauses (iii) through (xiii), respectively, and by inserting after clause (i) the following new clause:

(ii)the credit of an individual taxpayer determined under section 41 to the extent attributable to a specified medical research small business pass-thru entity (as defined in section 469(c)(4)),

(d)

Exception to limitation on pass-Thru of research credit

Subsection (g) of section 41 of such Code is amended by adding at the end the following: Paragraphs (2) and (4) shall not apply with respect to any specified medical research small business pass-thru entity (as defined in section 469(c)(4))..(e)

Effective date

The amendments made by this section shall apply to losses and credits arising in taxable years beginning after December 31, 2022.