Legal Alert: New Qualifying Therapeutic Discovery Project Credit Will Benefit Biotech Companies

The Patient Protection and Affordable Care Act, which was signed into law by President Obama on March 23, adds a new qualifying therapeutic discovery project tax credit to the Internal Revenue Code.  This credit, which is available for tax years beginning in 2009 and 2010, is equal to 50% of an eligible taxpayer’s qualified investment in a qualifying therapeutic discovery project.  This program provides a significant financial opportunity for companies in the biotechnology industry.  Taxpayers are required to apply for these credits, and the Secretary of the Treasury is authorized to award up to $1 billion in credits in 2009 and 2010.  Any taxpayer who has 250 or fewer employees is eligible to apply, and taxpayers may choose to apply for a grant in lieu of the tax credit.

Qualified Investments and Qualifying Therapeutic Discovery Projects
For purposes of the new credit, a “qualified investment” includes costs paid or incurred during the taxable year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project.  A “qualifying therapeutic discovery project” is any project which is designed to:

(a)  treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies, or by carrying out research protocols, for the purpose of securing approval of a product under Federal Food, Drug and Cosmetic Act § 505(b) or Public Health Service Act § 351(a);

(b)  diagnose diseases or conditions, or determine molecular factors related to diseases or conditions, by developing molecular diagnostics to guide therapeutic decisions; or

(c)  develop a product, process, or technology to further the delivery or administration of therapeutics.

A qualified investment does not include: (a) salaries for certain highly-compensated employees; (b) interest expenses; (c) facility maintenance expenses; (d) certain general and administrative costs of the taxpayer; and (e) other expenses determined by the Secretary of the Treasury.

Limited Funds Available
The total amount of qualifying therapeutic discovery project credits that may be awarded may not exceed $1 billion during 2009 and 2010.  The Secretary of the Treasury, in conjunction with the Department of Health and Human Services, is required to establish a program to consider and certify qualified investments no later than May 21, 2010.  Therefore, regulations setting forth the required form and content of the credit applications will likely be released in mid-May, and taxpayers must wait until then to prepare and submit their applications.

Once the program is established, the Secretary of the Treasury has 30 days from the date an application for a credit is submitted to approve or deny the application.  The identity of all entities that receive a qualifying therapeutic discovery project credit will be publicly disclosed.

Criteria for Certification
When determining whether to certify a qualifying therapeutic discovery project, the Secretary shall take into consideration only those projects that show reasonable potential: (i) to result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute diseases and conditions, (ii) to reduce long-term health care costs in the United States, or (iii) to significantly advance the goal of curing cancer within 30 years.

In addition, the Secretary shall take into consideration which projects have the greatest potential: (i) to create and sustain high quality, high-paying jobs in the United States, and (ii) to advance United States competitiveness in the fields of life, biological, and medical sciences.

Grants In Lieu of Credits
An eligible taxpayer may designate its application for a credit as an application for a grant instead.  Like the credit, the grant would be equal to 50% of the eligible taxpayer’s qualified investment in a qualifying therapeutic discovery project.  The grant is not subject to federal income tax, and the identities of grant recipients must also be publicly disclosed.  Grants will not be made to governmental entities or other organizations exempt from federal tax, or to any partnership or other pass-thru entity that has any of the foregoing as a partner or owner.

Applications for 2010 grants cannot be submitted until the day after the last day of the applying entity’s taxable year that begins in 2010 (January 1, 2011 for calendar year taxpayers), and may not be submitted later than the due date (including extensions) for filing the entity’s tax return for that year.  The last day to file a grant application is December 31, 2012.  Grants must be paid within 30 days after the date of the application or the date of the qualified investment, whichever is later.

Benefits and Applications
The qualifying therapeutic discovery project tax credit could provide a significant benefit to small and mid-size companies in the biotechnology industry who are considering investing in these types of projects.  Also, because the credit is available for tax years beginning in 2009, the credit can be used with respect to qualified investments that have been made since December 31, 2008.  Although the application process will not formally begin until late May, companies who want to compete for these credits should prepare now for the application process.  KMK will continue to monitor developments in this area, and our attorneys are available to assist clients in evaluating the credit and preparing applications.

For additional information please feel free to contact us.

Mark E. Sims
513.579.6966
msims@kmklaw.com

Michael J. Moeddel
513.639.3962
mmoeddel@kmklaw.com

Laura H. Cox
513.562.1451
lcox@kmklaw.com

KMK Legal Alerts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client nor any particular situation.  Please consult with counsel of your choice regarding any specific questions you may have.

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