May 26, 2010

IRS Releases Procedure for Claiming Therapeutic Discovery Credit

IRS Releases Procedure for Claiming Therapeutic Discovery Credit Tax & Business

The Therapeutic Discovery Project Credit (TDPC) was originally enacted within the Patient Protection and Affordable Care Act of 2010. The program’s main focus is to provide tax credits and grants to smaller firms that show significant potential to produce new and cost-saving therapies, support job growth and increase U.S. competitiveness. The credit will cover up to 50 percent of a company’s cost of qualifying biomedical research to firms with fewer than 250 employees. The credit will provide an immediate boost to the U.S. biomedical research and small businesses, however, the overall credit is limited to $1 billion overall.

The IRS has recently released guidance (Notice 2010-45) which outlines the procedures required for claiming the credit and provides information about the program and how taxpayers will be awarded with the credit or grant. Highlights of the notice include:

  • The application (Form 8942) which will be posted on the IRS website by June 21, 2010, must be submitted by July 21, 2010 and will be applicable for qualified investments made in taxable years beginning both in 2009 and 2010,
  • The IRS will conduct a preliminary review to verify the applications by October 1, 2010 and will inform taxpayers whether their applications are approved by October 29, 2010,
  • The credit will not be awarded on a first come, first-served basis,
  • The IRS plans to distribute its $1 billion allocation by certifying an equal amount of qualified investment for each project that meets the certification requirements,
  • Taxpayers must submit separate applications for each project. There is a $5 million cap per year for 2009 and 2010 on the total credit allocation for each taxpayer.

As mentioned in our prior Tax Flashes, a Qualifying Therapeutic Discovery Project should meet the following criteria:

  • Result in one or more new therapies which treat areas of unmet medical needs, or prevent, detect, or treat chronic or acute diseases or conditions.
  • Reduce long-term health care costs in the United States; or
  • Significantly advance the goal of curing cancer within the next 30 years.

Costs considered part of a qualifying therapeutic discovery project and eligible for the credit include those which are:

  • Designed to develop a product to treat or prevent a disease or condition.
  • Carried out by conducting pre-clinical activities, clinical trials, clinical studies, or research protocols.
  • Designed 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 Service Act.
  • Designed to develop technology to diagnose diseases and conditions, including determining molecular factors and developing molecular diagnostics to guide therapeutic decisions; or
  • Designed to develop a product, process, or technology to further the delivery or administration of therapeutics.

The application process will require taxpayers to include substantial documentation and a short statement, not exceeding 250 words, which should include:

  • The scientific rationale, based on prior conceptual and empirical work, which supports the belief that the proposed project will lead to the desired outcome.
  • The research and development plan that will lead to the desired outcome.
  • The scientific evidence relied on by the applicant, including a description of any peer review of the project.
  • A description of the stage of development of the project, including pre-clinical and clinical trial results relevant to the proposal.
  • A description of the resources, management experience, and organizational capacity of the business and an explanation as to why the business believes that such resources, experience, and capacity will support successful completion of the project.

As noted, the credit/grant will not be issued on a first come basis. The IRS has indicated that it will give priority to a project if it “is among those projects that have the greatest potential” to:

  • Create and Sustain high-quality, high-paying U.S. jobs; and
  • Advance U.S. competitiveness in the fields of life, biological and medical sciences.

The maximum credit is equal to 50 percent of costs in taxable years beginning in 2009 and 2010 necessary for, and directly related to, the conduct of an approved therapeutic discovery project. Costs specifically excluded are:

  • Remuneration for the CEO (or equivalent) and the other four highest-paid employees whose remuneration must be reported by SEC rules;
  • Interest expense;
  • Facility maintenance expenses;
  • Indirect service costs, such as general and administrative support, whether or not allocated to the activity under the uniform capitalization rules,
  • Certain grants or other funding may be taken into account when considering eligible expenditures.
Taxpayers can elect to receive a grant in lieu of the credit. This election is also made on the general application, and separate elections can be made for 2009 and 2010. (Government 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 application process for this credit is not similar to a medical or educational grant. The process, while including bio technical terms, is primarily financial. Many companies may need to seek outside resources for information gathering and application completion. Eligible entities should keep in mind that there will only be a 30 day window, between June 21 and July 21, 2010 to submit this application.

Related Service

Tax & Business