Minimum Performance Standards, Tax Deductions for Small Business Awardees

Funding News Edition: April 05, 2023
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Small businesses concerns, take note of two recent policy developments and corresponding guidance from NIH for small business innovation research (SBIR) and small business technology transfer (STTR) award recipients.

Minimum Performance Standards

NIH is updating its minimum performance standards for small businesses, to match the Phase I to Phase II Transition Rate benchmark and the Phase II to Commercialization Rate benchmark required by the SBIR and STTR Extension Act of 2022. The standards are designed to ensure small business award recipients are advancing projects routinely and successfully from Phase I to Phase II research, and from Phase II to commercialization.

The benchmark thresholds for Transition Rate and Commercialization Rate apply to SBIR/STTR recipients that have received more than 20 Phase I awards over the past 5 fiscal years and more than 15 Phase II awards over the past 10 fiscal years, respectively.

On June 1 of each year, the Small Business Administration (SBA) will identify those companies that fail to meet minimum performance requirements. SBA will notify companies and the relevant officials at the participating agencies.

Full details are listed in the February 23, 2023 Guide notice.

Tax Deductions

The Tax Cuts and Jobs Act of 2017 included major changes to section 174 of the Internal Revenue Code which took effect in fiscal year 2022. In particular, small business concerns can no longer deduct 100 percent of their research and development (R&D) costs in the same year they incurred those expenses and must instead spread out their R&D deductions over a period of 5 years.

NIH recognizes this change may negatively impact some small business award recipients, as they are now incurring larger tax liabilities than in previous years. Unfortunately, NIH is limited in how much it can help; seek guidance from the IRS or a trusted tax advisor if you need assistance understanding how the change will affect your organization.

You may also find the following FAQs to be useful:

Are federal income or excess profits taxes allowable costs in an SBIR or STTR award?

Per FAR 48 CFR 31.205-41, federal income/excess profits taxes are strictly not allowable charges to NIH awards, either as direct or facilities and administrative (F&A) costs. However, the SBIR/STTR fee may be used to pay for a tax liability. Per NIH Grants Policy Statement (NIH GPS) 18.5.4 Allowable Costs and Fee, the SBIR or STTR fee is not considered costs and may be used for any purpose by a small business concern.

What is the "fee"? How should a small business justify the fee in its application to an NIH SBIR or STTR program?

A reasonable fee, not to exceed 7 percent of total costs (direct plus F&A costs) for each phase (Phase I, Phase II, or Phase IIB) of a project is available to small business concerns receiving awards under NIH’s SBIR and STTR programs.

The fee is intended to be a reasonable profit factor available to for-profit organizations, consistent with normal profit margins provided to profit-making firms for R&D work.

The fee may be used by a small business for any purpose, including additional effort under the SBIR or STTR award or to pay for a tax liability. The fee is intended for the small business awardee; however, the SBIR or STTR recipient may decide to pay a portion of the fee to a contractor at their discretion. See NIH GPS Section “Profit or Fee” to learn more.

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