The Qualifying Therapeutic Discovery Project Credit
The Patient Protection and Affordable Care Act was signed into law by President Obama on March 23, 2010. A companion bill, The Health Care and Education Reconciliation Act of 2010, was signed into law on March 30. Together, the bills will significantly change the nation's health care system
The bills added new IRC section 48D to enact a provision entitled “The Qualifying Therapeutic Discovery Project Credit,” which allows a tax credit for new therapies to prevent, diagnose, and treat acute and chronic diseases. The credit is equal to 50 percent of the qualified investment made by an eligible taxpayer in certain therapeutic discovery projects during tax years beginning in 2009 or 2010. The credit will be subject to an overall cap of $1B over the two-year period.
An eligible taxpayer is a small business with fewer than 250 employees, at the time of application submission. A qualified investment is the aggregate amount of the costs paid or incurred for expenses necessary for and directly related to the conduct of the qualified project. A qualified therapeutic discovery project is one that is designed to treat or prevent diseases or conditions by conducting preclinical activities, clinical trials, and clinical studies, or carrying out research protocols. These activities must be conducted for the purpose of securing approval of a product under section 505(b) of the Federal Food, Drug, and Cosmetic Act or section 351(a) of the Public Health Service Act.
Projects aimed to diagnose diseases or conditions or determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions also qualify as do projects designed to develop a product, process, or technology to further the delivery or administration of therapeutics. Certain costs are excluded, such as interest expenses, facility maintenance expenses (mortgage or rent, insurance, utility, and maintenance personnel), service costs described under 1.263A-1(e)(4), and payment to employees described under 162(m)(3), which includes the CEO of the company or any employee the SEC has required to report his salary to shareholders based on the fact that he is among the four highest compensated officers.
The applicant may elect to apply for a grant (in the form of a refundable tax credit) rather than a credit. The grant election is important because it allows companies that do not anticipate having a significant tax burden to receive benefits. Many biotech startup companies are in this position. If a grant is received, a credit may not also be received in the current or subsequent taxable year. For tax years beginning in 2010, grant applications should be submitted no earlier than the day after the last day of the tax year, and no later than the due date for the filing of the tax return (including extensions). Once the grant has been certified, the grant will be paid during the 30-day period beginning on the latter of the date of the grant application or the date the qualified investment is being made. The Secretary will issue regulations to determine when the qualified investment is deemed to have been made for the purpose of ongoing investments.
The Therapeutic Discovery Project Credit is structured to prevent taxpayers from taking a double benefit. If a benefit is allowed for an expenditure related to depreciable property, the basis of that property must be adjusted for the amount of credit received. Furthermore, a benefit will not be allowed for any investment for which bonus depreciation is allowed. Additionally, the expenses included in the calculation of the benefit will not be allowed as a tax deduction to the extent of the amount of the benefit claimed. Finally, any expenses taken into account for this benefit may not be used to calculate the Orphan Drug Credit or the research tax credit.
The Treasury Secretary will review each application and will award the credit based on several criteria. First, the Secretary will only consider projects that show a reasonable potential of:
Additionally, the Secretary will consider which projects have the highest potential to create and sustain jobs in the U.S. or to advance U.S. competitiveness in the fields of life, biological, and medical sciences.
The Secretary will establish a program to review and consider each project for certification and allocation of credits within 60 days after the enactment of the Patient Protection and Affordable Care Act. In order to be considered in this review process, each taxpayer is required to submit an application for each potentially qualifying project with the Secretary. The application may include a request for the allocation of credits for more than one year. Review of the application will be completed within 30 days of the submission. The credit will be included on the tax return as a component of the general business credit on Form 3800.
This benefit will often be more lucrative than the traditional Research & Development (R&D) credit because the potential rate is higher than the R&D credit rate and because the provision permits the taxpayer to include the cost of depreciable assets purchased for qualifying projects, subject to a reduction in the property’s basis by the amount of the credit. The benefit is also available to pass-through entities such as partnerships and S corporations. Additionally, the owners of successful pass-though applicants will not be prevented from utilizing benefits by the application of the Alternative Minimum Tax. This also makes this credit more beneficial than the R&D credit.
As generous as the new benefit is, taxpayers must act quickly to apply as there is only a fixed amount of money available ($1B for the next two tax years). It will be important for taxpayers to submit applications that: take the award criteria into account, properly document proposed costs, and do not include unallowable expenses. Qualified costs should be accounted for and documented separately for each project so that each project can be evaluated separately on its merits and improve the taxpayer’s chances of having the grant or credit awarded for one or more projects. In short, in order to stay competitive, applicants should anticipate the preferences and likely actions of Treasury and begin gathering the documentation needed for the application process while definitive guidance is pending.
- Banking/Financial Institutions
- Consumer Products
- Financial Services
- Food and Beverage
- Government Contracting
- Government Entities
- Health Care
- Life Sciences
- Manufacturing and Distribution
- Private Clubs
- Private Equity
- Real Estate
- Specialized Industries