Federal Qualifying Therapeutic Discovery Project Credit
Tony Mancini – Tax Services
Dana Ingols – Tax Services
On March 23, 2010, President Obama signed the Patient Protection and Affordable Car Servicese Act, H.R. 3590, into law. Buried in this highly publicized health reform package is a provision that provides a significant new incentive for biotech companies and their investors: The Qualifying Therapeutic Discovery Project Credit (“Therapeutic Credit”).
The Bill refers to the credit as a grant and reflects what Congress has been doing with individuals; using the Tax Code and IRS to deliver socially desirable benefits in the form of refundable tax credits.
Enacted as Section 48D of the Internal Revenue Code, this unusual gift from Congress is one of the Act’s most generous provisions. The Act has set aside $1 billion to fund the Therapeutic Credit program.
A profitable business can claim the credit against its tax liability without alternative minimum tax (“AMT”) concerns. Because the credit is a refundable credit, a business that has no tax liability can also claim the credit but elect to treat it as a tax-free grant.
The Therapeutic Credit is available, and more particularly attractive, to new or stressed businesses not currently able to take advantage of the I.R.C. Section 41 R&D credit because they are not profitable or subject to AMT.
Who Can Benefit?
The Therapy Credit is retroactive to January 1, 2009, and expires at the end of 2010. Eligible taxpayers are afforded a 50% tax credit or tax free grant for qualified investments in qualifying therapeutic discovery projects. The credit is available to C corporations and pass-through entities (partnerships and S corporations). Government agencies or certain tax exempt entities as pass-through partners will not receive the benefit.
Eligible taxpayers are those taxpayers which employ not more than 250 employees in all businesses of the taxpayer at the time of the submission of the application.
Qualified investment expenses include the aggregate amount of costs paid or incurred in the taxable year for expenses necessary for and directly related to the conduct of a qualifying discovery project. These expenses do not include the pay of employees covered by IRC 162(m)(3) (for example, CEOs), interest expenses, facility maintenance expenses (including, mortgage or rent payments, insurance, utility and maintenance, and costs of employment of maintenance personnel), and certain indirect service costs (such as general and administrative costs) as defined in the Treasury Regulations 1.263A-1(e)(4).
What Type of Projects Qualify?
According to the legislation, a qualified therapeutic discovery project is designed to do one of three things:
- Treat or prevent diseases or conditions, by conducting pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of securing approval of a product under the Federal Food, Drug, and Cosmetic Act,
- Diagnose diseases or conditions, or 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.
Biotech companies investing significant resources in pre-clinical or clinical studies, which may take years to come to fruition to ultimately satisfy FDA requirements, could now recoup a significant portion of their expenses. Additionally, biotech start-ups focusing on the development of diagnostic assays, or applications to advance therapeutics and treatments can also benefit. Companies currently engaged in basic or applied research which may ultimately contribute to curing cancer within the next 30 years may also be excellent candidates. Along these lines, companies studying signal transduction pathways, gene therapy and stem cell research seem like prime candidates.
Documentation to Support Your Application
Congress has given guidance to the Treasury that the application guidelines are to be in place by May 23, 2010, within 60 days of the Act’s signing, and applications approved within 30 days after that.
Businesses need to be taking steps now to begin planning and drafting their applications based on the criteria, with particular emphasis on justification of dollars and expenditures that are qualified investments on a project-by-project basis.
Similar to the R&D tax credit qualifications, taxpayers will need detailed documentation of expenses for each project. A segregated project-by-project approach will allow your business a stronger chance of being awarded at least a partial credit or grant. While one project might not qualify, others may.
To increase your chances of being selected by the Treasury, it is critical the applications be accurate. This includes a proper summation of all allowable expenses while ensuring non-allowable expenses are not included in the application. Applications without the proper documentation or not in compliance with the tax code, Treasury regulations, and IRS guidance may likely be set aside. Your ability to document and quantify not only past expenditures but future R&D budgets will further help your application stand out from the rest.
Treasury Selection of Eligible Taxpayers
Since the funds allocated to this program are limited to $1 billion and credit selection is at the sole discretion of the Treasury, qualifying businesses should employ careful consideration and presentation to their applications. After the applications are reviewed for accuracy, documentation and content, two broad sets of criteria will be reviewed; the first being the medical benefit, and second being jobs and the economy.
Medical benefit factors include those projects that show reasonable potential to result in new therapies to treat areas of unmet medical need, or prevent, detect, or treat chronic or acute diseases and conditions. Projects to reduce long-term health care costs in the United States or to significantly advance the goal of curing cancer within 30 years are also a focus of the legislation. Your application does not need to include all, or any, of these goals but doing so will increase your chances of acceptance.
The jobs and economic factors to be promoted by Congress include those projects which create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States and advance the United States’ competitiveness in the fields of life, biological, and medical sciences. This could obviously translate to use of funds to hire graduate students, post doctoral or research and lab support staff.
Submit Your Application Early
This may well be a fast track type of application process where it’s as important to have an early application submission as it is to be well qualified. Regardless of the process, it’s important to start gathering information now to be ready for the applications once it is published. Once the $1 billion in funding is gone, it’s gone.