04.02.2010
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Updates
Biotech and biopharma companies now have an opportunity to recover up to 50% of their qualified investments in qualifying therapeutic discovery projects as a cash grant or tax credit. The Patient Protection and Affordable Care Act (the Act) signed into law on March 23, 2010, provides in Section 9023 that eligible companies can receive a cash grant or tax credit in an amount equal to 50% of qualified investments in qualifying therapeutic discovery projects. The following summarizes the details:
Grants or Tax Credits – Significantly, the Act provides for cash grants in lieu of tax credits for companies that have no tax liability.
Qualifying therapeutic discovery projects – Qualifying projects include biologics and drugs for treating or preventing disease, molecular diagnostics and products or processes for delivery of therapeutics.
Eligible companies – Those for-profit taxpayers employing not more than 250 employees. The legislation prevents the creation of a subsidiary, certain brother-sister companies or other affiliates as a way to avoid the 250-employee limit. Partnerships or other flow-through entities must have all for-profit members to qualify for a grant or tax credit.
Qualified investments – The Secretary of the Treasury will certify qualified investments. The Act does not provide a specific example of the type of expenses that will be allowed, but does list certain exclusions from qualified investments: executive compensation, interest, facility maintenance expenses, overhead and other expenses in the discretion of the Secretary. While the scope of this last category is not clear, there is concern that it may be used to exclude payments to or from third parties if such third parties could use those amounts to generate their own qualified investments.
Other Tax Benefits -- An expenditure that generates a tax credit cannot generate a double tax benefit. In other words, an expenditure for payroll that is a qualified investment cannot also be deducted as a compensation expense. There are also several technical rules limiting the amount of depreciation that can be taken if the investment in such property generates a grant or tax credit.
Applicable years – 2009 and 2010 $1 billion for all grants and tax credits for both years.
Application schedule – The Act provides that U.S. Treasury Department (the Treasury) has 60 days from the date of enactment to implement the program. Ask counsel to advise when applications will be available and accepted. The Treasury has 30 days to act upon an application. Please note that an application for a tax credit can cover multiple years, but an application for a grant for 2010 expenses cannot be submitted until the first day of the following tax year (January 1, 2011 for a calendar year taxpayer).
Selection criteria – Projects that show reasonable potential to result in:
- New therapeutics that address unmet needs or prevent, detect or treat chronic or acute conditions;
- The reduction of health care costs in the United States;
- A significant advance in the goal of curing cancer in the next 30 years;
- Creating or sustaining high quality jobs in the United States; and
- Advances for the United States in the fields of life, biological and medical sciences.
PRACTICAL ADVICE. While the exact nature of what the Treasury will be asking for will not be clear until the form of application is released, all potential applicants should begin to collect the data now that will be needed to qualify for a grant or tax credit for 2009. This information would include:
- A description of the qualifying therapeutic discovery project;
- A showing of how the project positively impacts each of the selection criteria;
- The amount of the qualified investments, how they relate to the project, why they are not disqualified expenditures, proof of what year in which such investments were made, and a breakdown of the costs between internal expenditures and external expenditures; and
- Proof of the company's eligibility.
Once the form of application is made available, the expectation is that many companies will apply in very short order. As the Treasury, by statute, has only 30 days to respond to an application, the $1, billion of credits most likely will go very quickly and latecomers may get shut out.
Companies seeking to participate in this program are advised to seek advice of tax counsel prior to submitting an application. The foregoing is a summary only and is not intended to provide tax advice.
Contact counsel for further information or an electronic copy of the full text of Section 9023.
