Tax Credits/Grants for Therapeutic Discovery Projects
The 2010 Patient Protection and Affordable Care Act establishes a 50 percent investment tax credit for eligible investments in qualifying therapeutic discovery projects. In lieu of the tax credit, a company may elect to receive a tax-free cash grant. To be eligible to receive the tax credits or grants, companies may file applications beginning June 21, 2010, and the applications must be filed no later than July 21, 2010 (a one-month application period).
The Act amends the Internal Revenue Code to include a new §48D. The provision allocates $1 billion during the two-year period of 2009 through 2010 for the program. Certifications for qualified investments will be awarded by the Secretary of the Treasury (the “Secretary”), in consultation with the Secretary of Health and Human Services (“HHS”).
The procedure for applying for certification under the qualifying therapeutic discovery project program was published in Notice 2010-45, issued by the Internal Revenue Service on May 21, 2010.
Eligibility for Tax Credits
The credit is available only to companies having 250 or fewer employees.
A “qualifying therapeutic discovery project” is a project that is designed to develop a product, process, or therapy to diagnose, treat, or prevent diseases and afflictions by: (1) conducting pre-clinical activities, clinical trials, clinical studies, and research protocols; or (2) developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.
Qualified investment for any taxable year with respect to any qualifying therapeutic discovery project does not include any cost for: (1) remuneration for the chief executive officer, or one of the four highest compensated employees other than the chief executive officer if such employee’s compensation is required to be reported to the shareholders under the Securities Exchange Act of 1934; (2) interest expense; (3) facility maintenance expenses; (4) certain general and administrative costs that can be identified specifically with, or directly benefit or are incurred by reason of, a “service department or function,” including personnel, accounting, data processing, security, legal, and other similar departments; or (5) any other expenditure as determined by the Secretary as appropriate to carry out the purposes of the provision.
Companies must apply to the Secretary to obtain certification for qualifying investments. The Secretary, in determining qualifying projects, will consider only those projects that show reasonable potential to: (1) result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute disease and conditions; (2) reduce long-term health care costs in the United States; or (3) significantly advance the goal of curing cancer within a 30-year period. Additionally, the Secretary will consider those projects that have the greatest potential to: (1) create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States; and (2) advance United States competitiveness in the fields of life, biological, and medical sciences. The Secretary will issue certifications by the end of October, based on the determinations made by HHS.
Election to Receive Grant in Lieu of Tax Credit
Taxpayers may elect to receive credits that have been allocated to them in the form of Treasury cash grants equal to 50 percent of the qualifying investment. Any such grant is not includible in the taxpayer’s gross income.
The provision applies to expenditures paid or incurred after December 31, 2008, in taxable years beginning after December 31, 2008.
For more information on this topic and what effect these new developments in tax law might have on you, please contact any of the tax attorneys or your personal Karr Tuttle Campbell attorney, all of whom can be reached at (206) 223-1313 or by visiting the firm’s Web site at www.karrtuttle.com