- $1 billion in therapeutic tax credits and grants available from Treasury
- Eligible life sciences and medical devices companies with not more than 250 employees
- 50% tax credit for "qualifying investments" in “qualifying therapeutic discovery projects”
- Option for non-taxable cash grant in lieu of investment tax credit
The recently enacted landmark health care reform legislation, H.R. 3590, the Patient Protection and Affordable Care Act, appropriates up to $1 billion in tax credits and cash grants for small and mid-sized life sciences companies to defray the costs of investment in qualifying therapeutic discovery projects undertaken in 2009 and 2010. The investment tax credit will be set forth in the newly created Section 48D of the Internal Revenue Code of 1986 (“IRC”), and be administered by the Department of the Treasury (“Treasury”) through a competitive application process. It is expected to provide significant economic benefits to qualifying life sciences companies.
In general, the new law establishes a 50% investment tax credit for “qualifying investment” in any “qualifying therapeutic discovery project” of an eligible taxpayer. The program is limited to investments on projects made during taxable years 2009 and 2010, and is also limited to small to medium sized life sciences companies.
Importantly, the law differs from traditional investment tax credits by adopting an alternative cash grant approach similar to that set forth in the 2009 Federal stimulus bill for renewable energy projects. Thus, the new law will allow companies to apply for a non-taxable cash grant in lieu of a tax credit. Given that many small to medium sized life science companies do not have significant Federal income tax liability, the cash grant option significantly enhances the appeal of the program.
Eligible Companies: Eligible companies are those employing not more than 250 employees at the time of the submission of the application.
Qualifying Projects and Expenditures: A “qualifying therapeutic discovery project” is one that is designed to:
- develop a product to treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, clinical studies, or research protocols;
- diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
- develop a product, process, or technology to further the delivery or administration of therapeutics.
Given the breadth of the criteria, it is expected that a substantial portion of small to medium sized biotechnology and medical device companies may have qualifying projects and expenditures. Qualifying expenditures for such projects include the costs paid or incurred in such taxable year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project. The following expenses, however, will be excluded:
- compensation expense for a company’s chief executive officer and four most highly compensated officers (other than the chief executive officer);
- interest expense;
- facility maintenance expenses such as mortgage or rent payments, insurance, utility and maintenance costs, including the costs of employing maintenance personnel;
- certain indirect service costs (e.g., general and administrative costs) under Section 1.263A–1(e)(4) of the Treasury’s Regulations; and
- any other expenses that may be specified by Treasury.
Selective Criteria: In selecting projects for approval, Treasury was instructed to take into account both medical and economic factors. Accordingly, projects will be evaluated on their reasonable potential to:
- result in new therapies or to treat unmet medical needs;
- prevent, detect, or treat chronic or acute diseases and conditions;
- reduce long-term health care costs in the United States; or
- significantly advance the goal of curing cancer within the next 30 years.
Economically, Treasury will consider which projects have the greatest potential to:
- create and sustain (directly or indirectly) high quality, high-paying jobs in the U.S., and
- advance U.S. competitiveness in the fields of life, biological, and medical sciences.
Based on our experience with the intensely competitive 2009 renewable energy application process, it is important for life science companies to compile information on qualifying therapeutic research projects as soon as possible and to develop detailed qualifying expense information for submission on a project by project basis. In particular, in order to be successful, applicants will need to provide Treasury with easily comprehensible, accurate expense information in a manner that separates out any ineligible expenses. Applications also will need to comply with applicable tax rules and regulations in order to avoid rejection or delay on technical grounds. In addition, because Treasury will be selecting projects on a competitive basis, companies should begin to develop persuasive arguments for why their projects merit selection in light of the specified therapeutic and economic criteria. As was the case with the renewable energy program last year, it is expected that the life sciences program will be oversubscribed.
Avoidance of Double Tax Benefit: The law sets forth a wide variety of special rules to prevent double tax benefits by companies participating in the program. Qualifying projects will not be eligible for orphan drug or research tax credits, and a credit will not be allowed for any investment for which bonus depreciation is allowed. To the extent that an investment credit is received, there may be a required downward adjustment of the tax basis of project-related assets that are eligible for tax depreciation allowances. Moreover, although the grants will be non-taxable, any resulting property such as a patent could have its basis reduced by the extent of the grant. Treasury is also expected to provide guidance on recapture of benefits, for example, where projects cease to meet the eligibility criteria or in the case of certain subsequent dispositions of related assets.
Next Steps, Timing of Application and Awards: Companies interested in either the tax credit or the cash grant program need to apply for advance certification from Treasury. Credits and grants will be awarded by Treasury in a competitive application process to be developed in consultation with the Department of Health and Human Services. Treasury’s guidance on the process is targeted for publication by May 21, 2010. Once the program is in place, Treasury will approve or deny applications within 30 days of submission. Given the temporary nature of the program and the $1 billion appropriations limit, it is advisable for companies to commence the application process promptly.