Editor: Anthony S. Bakale, CPA, M. Tax.
Excise Taxes
The nondeductible annual fee on branded prescription drugs was enacted by the Patient Protection and Affordable Care Act, P.L. 111-148, as amended by the Health Care and Education Reconciliation Act of 2010, P.L. 111-152 (the acts). The aggregate annual fee will be $2.5 billion for 2011. The fee increases to $4.1 billion for 2018 and decreases to $2.8 billion for 2019 and later. The IRS will allocate the aggregate annual fee to each covered entity based upon its proportionate share of branded prescription drug sales made during the preceding calendar year. Covered entities are certain manufacturers and importers of branded prescription drugs; those with branded prescription drug sales that are $5 million or less are exempt from the fee.
The fee will be calculated based on the proportion of each covered entity’s sales to any specified government programs: Medicare Part D, Medicare Part B, Medicaid, and any program under which branded prescription drugs are procured by the Department of Veterans Affairs, Department of Defense, and TRICARE retail pharmacy program.
In Notice 2011-9, the IRS asked taxpayers to submit a Form 8947, Report of Branded Prescription Drug Information, to the IRS by February 11, 2011, to provide data on branded prescription drugs, orphan drugs, and rebates. Notice 2011-9 also provided methodology and the approach for the preliminary 2011 fee allocation to each covered entity.
On May 2, 2011, the IRS issued rules (Rev. Proc. 2011-24) that provide the exclusive process available to covered entities to dispute the 2011 preliminary fee calculations and obtain any change to data that would be reflected in the final fee allocation. In order to participate in the dispute resolution process, a covered entity must submit a written error report to the IRS that is postmarked no later than June 10, 2011. In May, the IRS mailed preliminary fee calculations to the taxpayers, who had until June 10, 2011, to dispute the calculations. The IRS will mail final fee calculations to taxpayers by August 24 after making any necessary adjustments (Notice 2011-46). The payment of the fee from each taxpayer will be due no later than September 30.
Accounting Implications
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-27, Other Expenses: Fees Paid to the Federal Government by Pharmaceutical Manufacturers (Topic 720). This ASU provides guidance on how pharmaceutical manufacturers should recognize and classify in their income statements fees mandated by the acts.
The amendments in this ASU specify that the liability for the fee should be estimated and recorded in full upon the first qualifying sale, with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The pharmaceutical manufacturer should present the annual fee as an operating expense.
The amendments in the ASU are effective for calendar years beginning after December 31, 2010, when the fee initially becomes effective.
Tax Implications
An entity’s portion of the annual fee is not tax deductible. The branded prescription drug sales do not include sales of any drug or biological product for which a tax credit was allowed for any tax year under Sec. 45C.
EditorNotes
Anthony Bakale is with Cohen & Company, Ltd., Baker Tilly International, Cleveland, OH.
For additional information about these items, contact Mr. Bakale at (216) 579-1040 or tbakale@cohencpa.com.
Unless otherwise noted, contributors are members of or associated with Baker Tilly International.
