05.28.2010
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Updates
The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, provides an opportunity for biotech and biopharma companies to recover certified investments in qualifying therapeutic discovery projects as a cash grant or a tax credit. On May 21 the IRS published a notice pertaining to applications for these grants and credits.
The credit covers up to 50% of the cost of qualifying biomedical investments, up to a maximum credit of $5 million per firm and $1 billion overall, and is available only to taxpayers whose businesses collectively do not have more than 250 employees at the time of the submission of the application. To provide an immediate boost to U.S. biomedical research and the small businesses that conduct it, the credit is effective for investments made in 2009 and 2010. Firms can opt to receive a grant instead of a tax credit, so start-ups that are not yet profitable can benefit as well. To be eligible for a grant or tax credit, firms must file an application with the IRS for certification of their qualifying therapeutic discovery projects.
This Client Alert summarizes three aspects of the IRS notice:
- The application timeline
- The application content and review process
- Some important features of the legislation and the IRS notice
Application Timeline
Applications for certification must be submitted on IRS Form 8942. This form will be released no later than June 21, 2010. Applications must be postmarked no later than July 21, 2010.
Preliminary review of the applications will end on September 30, 2010. Applications will be considered “submitted” on October 1, 2010.
In the primary 2009-2010 allocation round, the IRS will approve or deny an application for certification no later than October 29, 2010. IRS decisions will be based in part upon Health and Human Services (HHS) determinations as discussed below.
Application Content and Review Process
The application will consist of two parts: a completed Form 8942 and an attached Project Information Memorandum. The Project Information Memorandum must contain, among other things, a project overview and answers to several questions designed to enable HHS to determine eligibility for certification.
The first set of questions in the Project Information Memorandum relate to the determination of the project as a qualifying therapeutic project. Basically the project must be designed to treat or prevent disease and lead to a new drug application (NDA) or a biologic license application (BLA), 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. Thus, generic drugs, dietary supplements and most cosmetics would be excluded.
The second set of questions in the Project Information Memorandum relate to the determination of whether the project shows that it is focused on achieving one of the following statutory goals:
(a) it will result in new therapies either to treat areas of unmet medical need or to prevent, detect or treat chronic or acute diseases or conditions, or
(b) it will reduce long-term health care costs in the United States, or
(c) it will significantly advance the goal of curing cancer within the next 30 years.
If HHS is satisfied that the project is directed toward a statutory goal, it will assess responses to the third set of questions to determine whether there is a reasonable potential that the project will achieve one or more of the statutory goals.
After HHS determines which projects are qualifying therapeutic development projects with a reasonable potential to achieve one or more statutory goals, the IRS will certify those projects with the greatest potential to:
(a) create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States, and
(b) advance U.S. competitiveness in the fields of life, biological and medical sciences.
Applications meeting the applicable criteria will be certified for all or a portion of their qualified investments. Qualified investments are defined as the aggregate amount of costs paid or incurred in 2009 and those paid or anticipated to be paid or incurred in 2010 for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project. Qualified investments do not include interest expenses, facility maintenance expenses, certain executive compensation expenses, certain service costs and other expenses as determined by the Secretary of the Treasury.
Some Important Features of the Legislation and the IRS Notice
- Amounts paid or incurred in taxable years beginning in 2009 or 2010 are covered by the statute, and applications for certification for grants or tax credits for both years must be submitted by July 21, 2010.
- A separate application must be submitted for each project.
- All certified projects will be published including:
- the identity of the applicant;
- the amount of the credit or grant;
- the type of project; and
- the location of the project.
- The IRS estimates 1,200 respondents to the program.
- Unnecessarily elaborate applications, including brochures and other presentations, will not be considered.
- The required project overview cannot exceed 250 words. Responses to the first and second set of questions in the Project Information Memorandum are limited to 50 words, and responses the third set of questions are limited to 250 words.
- There is no right to appeal any determination or the amount of a credit or grant.
Practical Advice
The IRS notice is 36 pages and addresses detailed and complex tax issues that transcend the scope of this Client Alert. Readers are urged to consult with a tax professional before and during the application process. 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 the IRS notice.
