A new credit — the Qualifying Therapeutic Discovery Project (QTDP) tax credit — targeted at biotech companies was enacted as part of the recent health care legislation. The Patient Protection and Affordable Care Act of 2010 (Pub. L. 111-148) added Section 48D to the Internal Revenue Code to provide a tax credit for therapeutic discovery projects. Applications must be made using Form 8942, (just released on Friday, June 18, 2010), and must be completed by July 21, 2010.
One billion dollars has been allocated for investments in therapeutic discovery projects made in 2009 and 2010. The QTDP credit for any taxable year is an amount equal to 50 percent of the qualified investments for such year; with a limit of $5 million per taxpayer.
Notice 2010-45 states that the identity and the amount of the credit for successful applicants will be publicly disclosed. If the application information is trade secret, confidential, or exempt under FOIA, a claim for exemption must be declared in the application.
Qualifying Therapeutic Discovery Project
A qualifying therapeutic discovery project is one that is designed:
- To treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies or by carrying out research protocols, in an effort to secure product approval under the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act;
- To diagnose or determine molecular factors related to a disease or condition by developing molecular diagnostics to guide therapeutic decisions; or
- To develop a product, process, or technology to further the administration or delivery of therapeutics.
The qualifying therapeutic discovery project excludes the following costs from being taken into account under the qualified investment:
- Executive compensation;
- Interest expenses;
- Facility maintenance expenses (e.g., utilities, mortgage costs);
- Service costs;
- Certain non-recourse funding; and
- Any other cost determined by Treasury to be inappropriate to claim.
The Treasury Secretary will only certify projects that show reasonable potential to:
- Develop new therapies that either:
- Treat areas of unmet medical need, or
- Prevent, detect, or treat chronic or acute diseases and conditions;
- Reduce long-term health care costs in the U.S.; or
- Advance the goal of curing cancer within the next 30 years.
Potential to advance U.S. competitiveness in the fields of medical and biological sciences and likelihood to create high quality and high paying jobs in the U.S. are factors that the IRS will consider in assessing the applicants.
Limitation on Expenses Claimed Under the QTDP Credit
Expenditures claimed under the QTDP credit may not also be claimed under the Section 41 research credit, the Section 45C "orphan drug" credit, or bonus depreciation. Also, if the taxpayer is allowed to include under the QTDP credit expenses related to depreciable property, the taxpayer must reduce the basis of the property. And, with a few exceptions, expenses claimed under the QTDP credit are nondeductible.
Deadline and Application Process
Form 8942 and a Project Information Memorandum are mandatory for a complete application. Form 8942 was just released on Friday, June 18, 2010 with a July 21, 2010 filling deadline. Applications will not be accepted after July 21, 2010.
Notice 2010-45 details both the requisite information the taxpayer must disclose on Form 8942 (e.g., number of employees) and the project description for the Project Information Memorandum. The Project Information Memorandum should contain detailed explanations in response to questions in Notice 2010-45, including detailed documentation of all expenses for each project.
From July 21-October 29, 2010, the IRS and Department of Health and Human Services will evaluate all applications. The IRS will approve or deny each application by October 29, 2010.
The credit is available to taxpayers with no more than 250 employees in all of their businesses, including both full- and part-time employees. It is expected to be available to hundreds of both publicly- and privately-held biotech, medical-device, and diagnostic companies.
Grant in Lieu of Credit
A taxpayer may elect to take a grant in lieu of the tax credit. Ineligible recipients include companies that are partially owned by a tax-exempt organization; any federal, state, or local government or political subdivision thereof; and other entities authorized to issue tax credit bonds. However, certain entities are excluded from the grant option. These entities include: federal, state, or local governments; tax exempt § 501(c) organizations; entities referred to in § 54(j); or any partnership or pass through entity that has the aforementioned entities as a partner or interest holder.
For questions regarding this advisory, please contact one of our attorneys from the following sections:
Corporate — Keith R. Solar at 619-685-1941 or email@example.com