Motley Fool | Military tax breaks, biotech and Abbot

Q: Are there any special tax breaks for military personnel?

A: Yes. Folks in uniform should read IRS Publication 3, "Armed Forces' Tax Guide." Some provisions available to the military include:

The exclusion from income of combat pay and some other allowances and payments.

The ability to use nontaxable combat pay as earned income for the Earned Income Tax Credit.

The deductibility of travel expenses for reservists.

Tax forgiveness for those who die in active service in a combat zone or from an injury received in a combat zone.

The Soldiers' and Sailors' Civil Relief Act of 1940 offers more protections. These include protection from eviction, the delay of civil court actions, and reduced interest rates (6 percent maximum) on mortgage loans and credit-card debt.

Learn more at www.defenselink.mil, www.irs.gov and www.Fool.com/taxes.

Q: What's a zero coupon bond?

- R.D., Lima, Ohio

A: Bonds are essentially loans, usually made to companies or governments. With a traditional 5 percent $10,000 bond, you lend $10,000 to the borrower. You receive interest payments of 5 percent per year. (In the past, people had to send in coupons in order to receive these payments.) When the bond matures, you get your $10,000, the principal, back. With a zero coupon bond, there are no interest payments, but the amount you lend is less than the amount you'll receive at maturity. Thus, a zero coupon bond could pay you the equivalent of 5 percent per year by having you lend $6,139 today in order to receive $10,000 in 10 years.

Fool's School | Investing in Biotech

Some biotechnology companies that are busy developing tomorrow's blockbuster medications will end up delivering powerful long-term performances. That's far from a sure thing, though, so look before you leap.

Biotech stocks can be volatile. The Fidelity Select Biotechnology mutual fund, for example, lost 41 percent in 2002 and then gained 33 percent in 2003. It gained only 4 percent in 2006, compared with nearly 16 percent for the S&P 500.

The promise of a wonderful new drug is exciting. But it can take 10 years or longer to get from development to market - and there are plenty of risks along the way. Near the end of the process, the drug must clear several Food and Drug Administration hurdles. Testing on humans begins with Phase I trials, continues in earnest with more-involved Phase II trials and concludes with Phase III. The entire trial process can take five years or longer. It can take another year to apply for and receive a verdict on FDA approval.

Don't despair, though. You can still invest effectively in drugs, via pharmaceutical giants such as Johnson & Johnson, Novartis, Abbott, Pfizer and Eli Lilly. Although the idea for a new drug might start with a scientist working for a small development-stage company, the product is likely to end up marketed and sold by these big guns. Since they have the financial and marketing clout to get the products manufactured and distributed widely, they often buy or license drug technology from small developers. They may even fund drug development at small firms in exchange for marketing rights. (You might also look at big biotech firms, such as Amgen and Genentech.)

There's a lot of logic to the saying that you should invest in what you understand. If you're not a scientist, think twice before investing in a small, unproven firm pinning its hopes on a possible big breakthrough. You can still profit from the release of exciting new drugs by investing in pharmaceutical giants with broad and deep product pipelines.

Foolish Trivia

I was founded in 1945 by Harold Matson and Ruth and Elliot Handler, who began by selling picture frames. Since 1959, I've sold more than a billion pink boxes of a product named after my founder's daughter. The product has toiled as a dentist, paleontologist and presidential candidate. I've made more vehicles than has Detroit. I merged with Tyco Toys and Fisher-Price in the 1990s and have inked licensing agreements with Disney, Sesame Street, Nickelodeon and Harry Potter. I rake in about $5.6 billion annually. My wheels are hot, my people little, and my girls American. Who am I?

Last Week's Trivia Answer: Born in 1971 in Arkansas and based in Tennessee, I'm now a $34 billion company. My 275,000-plus workers make more than 6 million deliveries each day to more than 220 countries and territories. My ground fleet tops 70,000 vehicles, and I operate the world's largest all-cargo air fleet (with 669 aircraft). I've repeatedly been named one of America's most admired companies. I pioneered overnight letters and was the first to offer next-day delivery by 10:30 a.m. and the first to offer Saturday delivery. There's a clever arrow in my logo, and I bought Kinko's in 2004. Who am I? (Answer: FedEx)

The Motley Fool Take | Abbott's Ban

Because intellectual property and patent estates are worth billions of dollars in the pharmaceutical industry, drug companies will aggressively protect these sources of competitive advantage. Look at Abbott Laboratories (NYSE: ABT) and Thailand.

After the Thai government decided to start producing generic versions of one of Abbott's HIV drugs still under patent protection, Abbott announced that it would not sell any new drugs in Thailand. It will not halt sales of current drugs, probably to give Thailand no further incentive to make copies of existing Abbott compounds.

The Thai people undoubtedly will feel the effect of the ban. Many drugs, such as biologics or complex sugars, cannot be replicated as easily as the compounds the Thai government already has targeted. And now, Thailand will have no way of getting any new products if other drug companies follow Abbott's lead.

Many people in the United States often decry rising health-care costs and the expense of new drugs. But it is because of our relatively free-market system for drug pricing and respect for intellectual-property rights that the United States is almost always the first country where pharmaceutical companies try to market their new medications.

In the short run, the move to make branded drugs generic before their patents expire may save the Thai government some money. But in the long run, its actions only reduce the incentive for pharmaceutical companies to innovate - and that's bad for everybody.