On May 2, 2011, the IRS issued rules (Rev. Proc. 2011-24), which provide an exclusive process available to covered entities, which are certain manufacturers and importers of branded prescription drugs, to dispute the 2011 preliminary fee calculation 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 1, 2011.
On May 16, the IRS was scheduled to mail a preliminary fee calculation to the taxpayers and taxpayers will have until June 1, 2011 to dispute the calculation.
The nondeductible annual fee on branded prescription drugs was enacted by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The aggregate annual fee will be $2.5 billion for 2011, increases to $4.1 billion for 2018, and decreases to $2.8 billion for 2019 and later. The aggregate annual fee will be allocated by the IRS to each covered entity based upon its proportionate share of branded prescription drug sales incurred during the preceding calendar year. Covered entities with branded prescription drug sales that are $5 million or less are exempt from this fee.
The fee will be calculated based on the proportion of each covered entity’s sales to any specified government programs which are: the Medicare Part D program, the Medicare Part B program, the Medicaid program, and any program under which branded prescription drugs are procured by the Department of Veterans Affairs, Department of Defense, and TRICARE retail pharmacy program.
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates. The Notice 2011-9 also provided methodology and the approach for the preliminary 2011 fee allocation to each covered entity.
Accounting Implication:
In December 2010, the FASB has issued Accounting Standards Update (“ASU”) No. 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This ASU provides guidance on how pharmaceutical manufacturers should recognize and classify in their income statement 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 annual fee should be presented as an operating expense.
The amendments in this 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 with respect to which a tax credit was allowed for any taxable year under IRC Section 45C.
If you require any assistance with the filing of written error report, Form 8947, or identification of Section 45C credit opportunities, please contact Saltmarsh, Cleaveland & Gund, (850) 435-8300.
Timelines Table:
February 11, 2011 (December 15 of each year in subsequent years):
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates.
May 16, 2011:
IRS will mail preliminary calculations to taxpayers
June 1, 2011:
If taxpayer believes that preliminary calculation contains error, it must make written error report to IRS postmarked by June 1 for claim to be considered.
August 15, 2011:
The IRS will mail final fee calculations to taxpayers by August 15 after making any necessary adjustments
September 30, 2011:
The payment of the fee from each taxpayer will be due no later than September 30.
© 2011 EisnerAmper LLP
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