Houston,Texas (PRESS RELEASE – April 6, 2010) – Last March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, H.R. 3590, into law. What many taxpayers may not realize about the highly publicized bill is that it contains a powerful new incentive for biotech companies: the Qualifying Therapeutic Discovery Project Credit (“Therapeutic Credit”). Enacted as Sec. 48D of the Internal Revenue Code, the Therapeutic Credit will allow some businesses to claim a credit for 50% of their qualified investment in qualifying therapeutic discovery projects for 2009 and 2010.
Two things set this incentive apart from similar programs:
1. Only businesses with 250 or fewer employees may qualify; and
2. Taxpayers may elect to receive grants in lieu of tax credits.
The ability to receive grants, in particular, makes the Therapeutic Credit especially attractive to the many small biotech companies (including pass-through entities) that have been unable to take advantage of the Sec. 41 R&D tax credit due to losses or AMT.
According to David Ji, a biochemist and alliantgroup Managing Director, “This new Therapeutic Credit provides small biotechs with much-needed capital to sustain their R&D programs, and it couldn’t have come at a better time, with the current investing climate. It has the potential to result in new treatments, new therapies, and life-saving cures.”
Universities, nonprofit research institutes and foundations, and the like will be interested in this credit insofar as any spinoff for-profit entities formed to develop and market the results of their biotech research may be eligible for this credit.
What Kinds of Projects and Costs Qualify?
Qualifying therapeutic discovery projects include those designed to accomplish the following:
- Treat or prevent diseases or conditions by conducting pre-clinical or clinical activities for the purpose of securing FDA approval of a product;
- Diagnose diseases or conditions, or determine the molecular factors related to diseases or conditions, by developing molecular diagnostics to guide therapeutic decisions; or
- Develop products, processes, and technologies to further the delivery or administration of therapeutics.
For example, biotech companies that are investing significant resources in pre-clinical or clinical studies, which may take years to come to fruition and 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 or other diseases and conditions may also be excellent candidates. Along these lines, companies studying signal transduction pathways, gene therapy, and stem cell research would be prime candidates for this program.
A taxpayer’s qualified investment includes most costs paid or incurred for expenses necessary for and directly related to the conduct of a qualifying project.
Justifying The Company’s Costs
Much like documenting the R&D tax credit, taxpayers will need detailed documentation of all expenses for each project. Especially important is ensuring that the credit/grant application includes all allowable expenses and no unallowable ones – and that projects are properly documented and in compliance with the tax code, Treasury regulations, and IRS guidance.
How Are Recipients Selected?
Unlike other tax credit programs, the Therapeutic credit is not available to all eligible businesses that apply. For those companies with qualifying projects, there is a limited pool of money allocated to these credits/grants. Applications are reviewed and selected by the treasury based on the following criteria:
- The project’s potential to result in new therapies for areas of unmet need or to prevent, detect, or treat chronic or acute diseases or conditions;
- The project’s potential to reduce long-term healthcare costs or advance the goal of curing cancer within 30 years; and
- The project’s potential to advance U.S. competitiveness in biotechnology while creating and sustaining high-paying jobs in the U.S.
Applying for the Therapeutic Credit
In order to claim the Therapeutic Credit, taxpayers must file an application with the Treasury Department for each qualifying project. Eligible biotech companies must act quickly for three reasons. First, there is a limited pool of $1,000,000,000 in credits/grants allocated to this program, and when it’s gone, it’s gone. Second, only tax years beginning in 2009 and 2010 qualify. Finally, Congress has advised Treasury that this program should be in place in 60 days, and applications approved within 30 days after that. Clearly, the companies that apply first with the right qualifying projects and the best supporting documentation will reap the benefits.
David Ji added, “The key is making your application stand out from the rest, not only in terms of technical submissions, but also in terms of how you’re quantifying and documenting past expenditures and future R&D budgets.”
According to Dean Zerbe, National Managing Director at alliantgroup and former Tax Counsel on the Senate Finance Committee, “Interested business owners should be sharpening their pencils now to apply for these funds — this may well move on a fast train from the Treasury. Every once in a while something that is ‘too good to be true’ turn out to actually be true. This is one of those times” (Forbes.com, 3-26-2010).
You may read Dean Zerbe’s article on this credit on Forbes.com at: http://www.forbes.com/2010/03/26/health-reform-biotech-tax-credit-personal-finance-dean-zerbe.htmlHouston, March 29, 2010