The recently enacted health care reform legislation (H.R. 3590) includes a generous new tax credit that could benefit biotech firms and other health companies with fewer than 250 employees.
The Therapeutic Discovery Project Credit is equal to 50 percent of certain costs incurred in taxable years beginning in 2009 and 2010 for "qualified investment" by certain businesses in "qualifying therapeutic projects." A taxpayer may elect a direct cash grant in lieu of the credit, allowing qualifying businesses to share in the incentive even if they do not currently have taxable income.
However, the total amount of credits and cash grants is limited to $1 billion, and you must apply to the IRS for your share. Businesses that could benefit from this opportunity should begin gathering evidence and planning their applications now to insure they maximize their chances of receiving their share of the money.
The following questions and answers are intended as a general guide to the new Therapeutic Discovery Project Credit. Every situation will have its own complexities, so you should consult with your tax advisor to make sure your application has the greatest chance of acceptance when the IRS allocates the $1 billion. The professionals at Grant Thornton, LLP regularly assist their clients in the perfection of tax claims and stand ready to assist you in preparing yours.
What tests do I have to meet in order to take advantage of this incentive?
In order to take advantage of the Therapeutic Discovery Project Credit, you must:
- incur certain costs in connection with a "qualifying therapeutic discovery project" in taxable years beginning in 2009 or 2010;
- be a an "eligible taxpayer," an employer with not more than 250 employees in all of your businesses, during the taxable year in which the costs were incurred; and
- apply for a portion of the $1 billion in credits and be certified by the IRS.
What are "Qualifying Therapeutic Discovery Projects"?
A qualifying therapeutic discovery project is one that is designed to develop a product, process or therapy to diagnose, treat or prevent diseases and afflictions by:
- conducting pre-clinical activities, clinical trials, clinical studies and research protocols 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 Services Act;
- developing technology or products designed to diagnose diseases and conditions, including determining molecular factors and developing molecular diagnostics to guide therapeutic decisions; or
- developing a product, a process or technology to further the delivery or administration of therapeutics
The project does not have to be completed, successfully or otherwise, in order to claim the credit (although relative chances of success may be considered by the IRS in allocating the $1 billion). Although referred to as a discovery credit, the statutory language does not require the project to meet a specific "discovery" standard if it otherwise satisfies the statutory requirements.
What costs are eligible for the credit?
Costs that are paid or incurred in taxable years beginning in 2009 and 2010 that are necessary for and directly related to the conduct of the therapeutic discovery project are generally eligible for the credit. However, certain costs are specifically excluded:
- Remuneration of the CEO (or equivalent) and any other employee whose remuneration is required to be reported under the Securities and Exchange Act of 1934 by reason of being one of the four highest compensated officers (other than the CEO)
- Interest expense
- Facility maintenance expenses, such as: o Mortgage or rent
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- Insurance on the facility
- Utilities and maintenance costs
- Employment costs of maintenance personnel
- Indirect service costs, such as general and administrative support, whether or not allocated to the activity under the uniform capitalization rules
Who is eligible to claim the credit?
Businesses with 250 or fewer employees are generally eligible to claim the credit. All entities under common control must be included in determining the number of employees.
How do I get my share of the $1 billion?
In order to get your share of the $1 billion, you must submit the details of your project to the IRS for certification. Detailed instructions will be published by the IRS at a later date, but in order to be certified, the project must show reasonable potential to achieve one of the following four outcomes:
- Result in new therapies to treat areas of unmet medical need
- Result in new therapies to prevent, detect or treat chronic or acute disease and conditions
- Reduce long term health costs in the United States
- Significantly advance the goal of curing cancer within a 30-year period
The IRS is then directed to take the following into consideration:
- The ability of the project to create and sustain high quality, high paying jobs in the United States
- The ability of the project to advance the United State's competiveness in the fields of life, biological and medical science
The IRS is expected require taxpayers to supply supporting documentation and evidence that a project will meet these criteria. Because there may be significant competition for a limited allocation of money, submitting adequate supporting documentation may be a key factor in obtaining the credit.
The certification process will also likely require:
- a description of the project, and
- an itemized list of costs paid or incurred during taxable years beginning in 2009 and/or 2010 that are necessary for and directly related to the conduct of the project.
When and how do I file?
Detailed instructions will be published by the IRS at a later date. These instructions are expected to announce the date on which applications will first be accepted. The IRS is required to approve or deny applications within 30 days of submission. Because of this 30-day rule, it is important not to delay the filing. Once the IRS has approved $1 billion worth of credits, no more will be available unless Congress enacts additional legislation.
How do I elect the cash grant?
For costs incurred in taxable years beginning in 2009 you can elect the cash grant as part of your request for certification. For costs incurred in taxable years beginning in 2010, you must apply for the grant no later than the due date, including extensions, of the return for that year.
Is everyone eligible for the cash grant?
No. Governmental entities, tax-exempts and cooperative electric companies are not eligible for the cash grant. In addition, any partnership or pass-through entity that has such an entity as a partner or other holder or an equity or profits interest is ineligible for the cash grant, although it may be eligible for the credit.
The presence of a tax-exempt partner disqualifies the entire partnership from receiving a cash grant. For example, a medical research partnership that includes equal investment from three doctors and one state pension fund could qualify for the credit and pass their share of the credit through to its individual taxpayer partners. It may not apply for a cash grant equal to the individual partners' share of the credit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.