The Internal Revenue Service, in consultation with the U.S. Secretary of Health and Human Services, has established a new Qualifying Therapeutic Discovery Project tax credit and grant (the Therapeutic Discovery Credit/Grant) that may provide significant financial benefits to small and medium-sized biotechnology and life sciences firms and their investors. The Therapeutic Discovery Credit/Grant, established by the Patient Protection and Affordable Care Act and enacted as Sec. 48D of the Internal Revenue Code, provides $1 billion in tax credits and grants for expenditures necessary for and related to “qualifying therapeutic discovery projects.”
Under the statute, a taxpayer may receive 50 percent of the amount of those projects made in a taxable year beginning in 2009 or 2010. Because the Therapeutic Discovery Credit is payable as either a tax credit or a nontaxable grant, at the election of the applicant, taxpayers who have operating losses and are thus unable to utilize tax credits currently may nevertheless recognize a current cash flow benefit from this program. Certain entities that do not pay federal income tax, however, are not eligible for a grant, including federal, state or local governments, certain tax-exempt organizations and “qualified issuers” as defined in Internal Revenue Code section 54(j)(4). Partnerships and other pass-through entities with ineligible partners or members are also not generally eligible to receive grants.
For purposes of the Therapeutic Discovery Credit/Grant, a “qualified investment” is the aggregate amount of costs paid or incurred for expenses necessary for and directly related to the conduct of a “qualifying therapeutic discovery project.” A qualifying therapeutic discovery project is a project designed to:
- treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies or carrying out research protocols aimed at securing Food and Drug Administration approval of a product,
- diagnose diseases or conditions,
- determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions, or
- develop a product, process or technology to further the delivery or administration of therapeutics.
A “qualified investment” does not include certain types of costs, such as (1) remuneration costs of the chief executive officer and highest four compensated officers; (2) interest expenses; (3) facility maintenance expenses (mortgage or rent, insurance, utilities and maintenance); (4) certain general and administrative costs of the taxpayer; and (5) other expenses determined by the Secretary of the Treasury. In addition, qualifying therapeutic discovery projects do not qualify for the research credit, orphan drug credit or bonus depreciation.
In order to be eligible for the Therapeutic Discovery Credit/Grant, a taxpayer must employ, in all of its businesses, not more than 250 people at the time it submits its application, taking into account certain aggregation rules that apply to groups of affiliated taxpayers. In addition, the Therapeutic Discovery Credit/Grant legislation provides for certain limitations intended to prevent “double dipping.” These include:
- No deduction is permitted for expenses for which a Therapeutic Discovery Credit/Grant is received.
- If credit is given for qualified expenditures relating to depreciable property, the tax basis of that property must be reduced by the amount of the credit.
- Expenditures for which a Therapeutic Discovery Credit/Grant is received will generally be excluded from the determination of the amount of certain otherwise potentially available tax credits.
The process for receiving a Therapeutic Discovery Credit/Grant or grant will be a competitive one, as finite resources have been allocated. Taxpayers will be required to apply for an allocation of the available amount and the applications will be reviewed and selected by the Treasury based on the following criteria:
- The project’s potential to result in new therapies for areas of unmet need or to prevent, detect, or treat chronic or acute diseases or conditions;
- The project’s potential to reduce long-term healthcare costs or advance the goal of curing cancer within 30 years; and
- The project’s potential to advance U.S. competitiveness in biotechnology while creating and sustaining high-paying jobs in the United States.
On May 21, the IRS released guidance on the Therapeutic Discovery Project Credit/Grant. Some critical items include:
- Applications must be filed on Form 8942 and each project must be applied for separately.
- That form is expected to be released no later than June 21, and applications must be postmarked no later than July 21.
- HHS appears to be the primary determiner of which projects should be funded.
- There will be a $5 million per-taxpayer limitation on allocations of credits/grants (for 2009 and 2010 together), regardless of the number of projects sponsored.
- In the first round of allocations, the IRS will approve or deny applications no later than Oct. 29, 2010, and will notify taxpayers by letter.
- All decisions are final.
- The 250-employee limit includes both full-time and part-time employees (but not leased employees).
- Taxpayers are required to inform the IRS of any significant changes in plans that arise prior to the date of IRS certification of the projects.
- Grant applicants must provide a DUNS number with their application, which can be obtained at no cost.
- Grant applicants must also register with the Central Contractor Registration, and registration must be completed before a payment can be made.
- Approved credit and grant applicants are advised that the IRS will publicly disclose their identities and the amount of their credit or grant.
- The statute authorizes public disclosure of more information for projects awarded grants than for those awarded credits. As a result, the IRS requests authorization to publish such information for approved projects awarded credits. While such consent is not required to receive a credit allocation, it’s not clear whether withholding it could have any impact on a borderline project being approved.
- Unnecessarily elaborate applications are discouraged and brochures or other presentations are not permitted as part of the applications and will not be considered.