The federal government has ignited a flurry of activity among small pharmaceutical and biotech companies to capitalize on the new Qualifying Therapeutic Discovery Project Tax Credit (the “Credit”). Competition is heightened by a cap on available funds and the comparative selection criteria; therefore, those eligible should take early and immediate steps to apply for the credit.
The Credit, established by the Patient Protection and Affordable Care Act (the “Act”), enacted in March 2010, offers a new tax credit that can assist qualifying pharmaceutical and biotech companies engaged in the development of new products and therapies. The Credit can be applied to 50 percent of expenditures in tax years 2009 and 2010 toward “qualifying therapeutic discovery projects.” The Credit is also available as a nontaxable grant. The grant option will especially benefit smaller firms that otherwise may not be able to take full advantage of the Credit opportunity. Up to $1 billion is allocated for this program, with a cap of $5 million dollars per firm, and interested businesses must participate in a competitive application process to utilize the Credit.
Step 1: Who Qualifies for the Credit?
The Credit is available to firms with no more than 250 employees that make “qualified investments” in “qualifying therapeutic discovery projects.”
Step 2: What Qualifies for the Credit?
A “qualified investment” is the aggregate amount of costs directly related to “qualifying therapeutic discovery projects.” There are exclusions for costs associated with (i) salaries for highly paid employees; (ii) interest expenses; (iii) facility maintenance expenses (including rent, insurance, etc.); (iv) administrative costs; and (v) other expenses excluded by the IRS.
A “qualifying therapeutic discovery project” is a project designed to do one of three things:
- Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies by carrying out research protocols for the purpose of securing federal government approval from the FDA;
- Diagnose diseases or conditions or 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.
Step 3: Meeting the Requirements for the Credit
The Secretary of the Treasury (working through the IRS) finalized the program requirements on May 21, 2010. According to the IRS Notice, the application Form 8942 will be released no later than June 21, 2010 and applications must be submitted using the Form 8942 by July 21, 2010. While the official application form is not yet available, Appendix A to the Notice describes, in detail, the content and format of information to be provided by an applicant, as well as the questions that must be answered in an applicant’s Project Information Memorandum to be filed with the Form 8942. Appendix A also identifies the evaluation criteria to be used by the IRS and Department of Health and Human Services (“HHS”) in the review of applications. The IRS Notice and Appendix A are available at this Web address: http://www.irs.gov/pub/irs-drop/n-10-45.pdf. It is recommended that potential applicants review these materials now to determine if your company should consider submitting an application. In addition, given the limited time for submitting applications, applicants should begin gathering supporting documents and drafting the Project Information Memorandum.
Step 4: Considering the Application Timeline and Selection Criteria
The Act requires quick disposition of applications — following a preliminary review period to conclude on September 30, 2010, the IRS is required to approve or deny applications within 30 days. Applicants will be advised of the IRS’s determination by October 29, 2010. Because the Credit “pool” is capped at $1 billion and the pool of available funds drains with each approved application, it is imperative that applicants file their applications in advance of the July 21 deadline; subsequent rounds of allocations will only be held if funds remain in the pool following the initial application cycle. Although time is of the essence, applicants should take care to submit complete, thorough, and accurate applications, as there will likely be no opportunity for corrections.
In determining which applicants may utilize the Credit, the HHS and the IRS may consider only projects that show reasonable potential (i) to result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute diseases and conditions; (ii) to reduce long-term health care costs in the U.S.; or (iii) to significantly advance the goal of curing cancer within a 30-year period. Additional criteria for evaluation include projects with the greatest potential (i) to create and sustain high-quality jobs in the U.S.; and (ii) to advance U.S. competitiveness in the fields of life, biological, and medical sciences.
Because application strategies will vary depending upon a business’s unique composition and qualifying development activities, we recommend consulting with your company’s tax professional or accounting firm as soon as possible. In light of the newly released application procedures, your tax advisor should be able to identify documentation needed for the application, thus ensuring your company’s ability to complete the application quickly and thoroughly. Separate applications must be submitted for each qualifying project, but note that the IRS will not certify more than $10 million as a qualified investment for any single taxpayer, such that no business will be allocated more than $5 million in credits or grants, regardless of the number of projects the business sponsors. Also, applications must be certified, and because documentation describing your firm’s research and business may be discoverable at a later time, it is advisable to ensure all statements are consistent with your firm’s representations to other government entities, such as the PTO or the FDA.
Qualified candidates should be mindful to submit accurate and definitive materials to avoid any reasons for denial during review as there is no right for a conference or to appeal the IRS’s final decision. In drafting the application, it is useful to consider the audience and the reviewers’ time constraints. Keep your application as clear and concise as possible. Follow the prescribed format and rules, including prescribed limitations on words, and use a clear, consistent theme. Strive to make the application easy to read, follow, and believe. Mimic the language of the requirements while weaving in your evidence to convince the reviewer of the worthiness of your project. Keep in mind the purpose and goals of the Credit. Highlight your successes and your track record, and point to analogous situations and economic studies for support. Try to differentiate yourself from your competition. A well-organized, easy-to-read application that clearly sets forth how the project meets the requirements will help facilitate the application review process and improve your chances of approval.
For additional information, contact either of the Fish & Richardson attorneys below.
Teresa Lavoie Joseph Taylor