Jump-Starting Biomedical Research and Development
April 30, 2010
The New Therapeutic Tax Credit and Cash Grant Program
The Qualifying Therapeutic Discovery Project Tax Credit program was created by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148. This new, and temporary, program will be a valuable tool to incentivize industry to develop cutting edge drugs, diagnostics, biologics, and medical devices.
Qualifying Therapeutic Discovery Project Tax Credit
The PPACA amends the Internal Revenue Code to create a temporary tax credit for qualifying therapeutic discovery projects for the tax years 2009 and 2010. Businesses with no (or insufficient) tax liability can also benefit from the program, since the program permits applicants to elect to receive a cash grant in lieu of the tax credit.
Because the tax credit and grant program is capped at $1 billion in the aggregate, it will be important for businesses to monitor the Treasury Department’s establishment of the certification program, and to submit applications for certification as quickly as possible once applications are being accepted. It is expected that the Treasury Department will issue guidelines implementing the program on or before May 22, 2010.
Once the program is established, the Treasury Department must approve or deny an application for the tax credit or grant within 30 days of receipt and must publicly disclose the identity of any applicant awarded a credit or grant and the amount of such credit or grant.
The tax credit or grant generally is available to companies with 250 or fewer employees, except tax-exempt organizations and governmental entities (as well as partnerships or other pass-through entities with such an organization or entity as a partner) are not eligible for the grant. The amount of the tax credit or grant is equal to 50% of the qualified investment for the taxable year for any qualifying therapeutic discovery project.
A qualifying therapeutic discovery project is a project which is designed to:
- 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 obtaining FDA approval of the product; or
- diagnose diseases or conditions to 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.
In addition to the above criteria, the Treasury Department, when certifying the expenses eligible for the tax credit, must consider whether the qualifying therapeutic discovery project:
- Has reasonable potential to result in new therapies to treat areas of unmet medical need; to prevent, detect, or treat chronic or acute diseases; to reduce the long-term health care costs in the U.S.; or to significantly advance the goal of curing cancer within 30 years; and
- Has potential to create and sustain high quality, high paying jobs in the U.S. and to advance the U.S. global competitiveness in life, biological, and medical sciences.
These two criteria are intended to bridge innovative research with economic stimulus, and build off of significant efforts in the American Recovery and Reinvestment Act of 2009 to utilize the life sciences industry to revitalize the economy.
A qualified investment means the aggregate amount of costs and expenses paid or incurred during tax years beginning in or coinciding with the 2009 and 2010 calendar years “necessary for and directly related to” the conduct of the qualifying therapeutic discovery project. It does not include certain expenses such as: salaries paid to a CEO and certain highly paid executives of public companies, interest, certain facility maintenance and overhead expenses, service costs, or any other expense determined by the Treasury Department to be excluded.
The program also includes special rules for calculating the credit or grant relative to other tax credits (such as the research tax credit and the so-called orphan drug tax credit), and prohibits double benefits (qualified expenses counting toward both the qualifying therapeutic discovery tax credit and deductions for business expenses or depreciation).