The Patient Protection and Affordable Care Act, widely known as the health care bill, includes a new temporary incentive for small biotech companies that is intended to encourage investments in new therapies to prevent, diagnose and treat acute and chronic diseases and conditions.

The new provision, in section 48D of the Internal Revenue Code, is a temporary and limited credit, but eligible companies may elect to receive a Treasury Department grant in lieu of a tax credit. The incentive expires in 2010, and is subject to an overall cap of $1 billion. Eligibility for the incentive is limited to small companies, meaning businesses that do not have more than 250 employees. In order to implement the overall cap, the incentive is available only if the Treasury Department approves a company’s application for a portion of the pool of credits and grants.

Qualified projects

For companies selected to participate in the program, the credit is a generous 50 percent of qualified investments made during 2009 and 2010 in “qualified therapeutic discovery projects,” which are projects designed:

  • to treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies, or carrying out research protocols, for the purpose of securing approval of a product;
  • to diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
  • to develop a product, process or technology to further the delivery or administration of therapeutics.

Certification program

Companies must apply to the IRS to obtain certification for qualifying investments. The statute directs the Treasury, in consultation with HHS, to establish within 60 days of enactment a program to award certifications for qualified investments eligible for the credit. Although the deadline of May 21 is rapidly approaching, guidance could be released at any time. Companies who have not already begun preparations should ramp up their efforts immediately in order to be in a position to attempt to take advantage of the incentive offered by the new law.

Because the pool of credits and grants is limited to $1 billion and expires in 2010, companies need to be prepared to submit a complete and persuasive application as soon as possible after the details of the program become available. The incentive has caused quite a stir in the biotech community, and is likely to engender a highly competitive allocation process. The Treasury Department has acknowledged the pressure it is under to provide immediate guidance on the therapeutic discovery credit.

The statute also directs the Treasury to take action to approve or deny an application for certification within 30 days of submission. If Treasury is able to act that quickly, it may not take long for the pool of available incentives to be exhausted.

Selection criteria

In determining the projects for which qualified investments may be certified, Treasury:  

  • shall take into consideration only those projects that show reasonable potential  
    • to result in new therapies  
  • to treat areas of unmet medical need, or  
  • to prevent, detect or treat chronic or acute diseases and conditions,  
    • to reduce long-term health care costs in the United States, or  
    • to significantly advance the goal of curing cancer within 30 years, and  
  • shall take into consideration which projects have the greatest potential  
    • to create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States, and  
    • to advance U.S. competitiveness in the fields of life, biological and medical sciences.  

Qualified investment

A company’s qualified investment includes most costs paid or incurred for expenses necessary for and directly related to the conduct of a qualifying project, up to the amount certified by the Treasury. Qualified investments do not include interest expense, facility maintenance expenses, service costs or certain officer remuneration. To prevent double-dipping, qualified investments do not qualify for the research credit, the orphan drug credit or bonus depreciation. In addition, expenditures are not deductible (or, to the extent related to depreciable property, must be used to reduce basis) to the extent of the credit attributable to the expenditures.

Grant in lieu of tax credit

In lieu of a tax credit, the company may elect to receive the incentive in the form of a Treasury grant that is excluded from gross income for federal income tax purposes. This feature is expected to make the incentive extraordinarily popular among small biotech companies in their development phase who need cash but are often unable to take advantage of tax credits due to losses.

This election is not available to a governmental person, a tax-exempt person, a qualified issuer of clean renewable energy bonds or a partnership or other pass-through entity in which any of the foregoing is a partner or similar holder.


Prior to the Act, the only tax credits available for investments in new therapies to prevent, diagnose and treat acute and chronic diseases and conditions were the research credit and the orphan drug credit for clinical testing expenses for rare diseases and conditions. The new credit for therapeutic discovery projects is a significant expansion of the available tax incentives, both in terms of the nature of the qualifying projects and the ability of companies to choose a grant in lieu of a tax credit.

Given the recent success and popularity of other limited programs for targeted tax incentives, such as the section 48C advanced energy project credit, the pool of $1 billion for therapeutic discovery project credits and grants is expected to be fully subscribed in short order. Companies are well-advised to be prepared to file an application for an allocation as soon as the IRS/HHS guidelines become available.