June 2, 2016

The Qualifying Therapeutic Discovery Project Credit

by Monte S. Colbert, CPA

The Qualifying Therapeutic Discovery Project Credit

As 2010 begins, America is still grappling with the prospect of providing affordable health care for everyone. However, one of the biggest challenges the healthcare industry and society at large face gets little press. While the tax law provides credits for expenses related to human clinical testing of drugs for certain rare diseases, present law does not provide credits to encourage investment in new therapies for diseases. As executives at small biotech and pharmaceutical companies nationwide struggle to find funding and keep hope alive for drugs and therapies of the future, the Senate recognized their efforts and provided a tax credit to fund these projects when they passed the Patient Protection and Affordable Care Act of 2009.

This Senate bill earmarks $1 billion in the form of 50% investment tax credits for qualified investments over 2009 and 2010. The Secretary of the Treasury, in conjunction with the Secretary of Health and Human Services, will administer the project and award certifications for qualified investments based on an application process. The tax credit will be available to companies that employ 250 or fewer employees and are involved in a qualifying therapeutic discovery project which 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

Qualifying projects must demonstrate 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 30 years

Additional considerations for qualification are the potential to:

  1. Create and sustain ( directly or indirectly) high quality, high paying jobs in the United States, and
  2. Advance the United States’ competitiveness in the fields of life, biological, and medical sciences

The qualified investment for each taxable year is the aggregate of the costs paid for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project.

The qualified investment does not include expenses for:

  1. Employees such as the CEO or the 4 highest compensated officers,
  2. Interest expense,
  3. Facility maintenance expenses,
  4. Costs that may be capitalized pursuant to the inventory capitalization rules,
  5. Any other expenditure as determined by the Secretary as appropriate to carry out the purposes of the provision.

Expenditures for the projects are non-deductible to the extent of the credit claimed and do not qualify for bonus depreciation or the Research or Orphan Drug Credit.

While the current status of health care reform remains uncertain, we will continue to provide updates on this important credit as legislation winds its way through the political process.