Funding is certainly an ongoing challenge for firms in the nation's biotechnology sector, which employs more than a million American workers and is an important engine for economic growth in the U.S. Perhaps surprisingly, the majority of the firms in this critical sector are small businesses with fewer than 50 employees and, often, a negative bottom line.

To provide funding for crucial biotech projects and create jobs during these challenging economic times, Congress created a two-year qualifying therapeutic discovery project program as part of this year's health reform legislation. On May 21, 2010, the IRS issued Notice 2010-45 providing guidance for firms interested in participating in the program.

The new program provides a limited pool of one billion dollars to fund eligible therapeutic projects. Qualifying small and mid-size biotech firms can recover 50 percent of their qualified investments in certain biomedical research projects in the form of federal tax credits or, significantly, tax-free grants. However, unlike other federal tax credits, it's not available to every firm that meets the general requirements of the program. Instead, biotech firms must complete an application process that has their project(s) competing against those of other biotech firms for the limited pool of funds.

Eligible Firms
The qualifying therapeutic discovery project program is limited to small and mid-size biotech firms, including C corporations, S corporations, partnerships and proprietorships. Governmental entities and all other tax-exempt organizations are not eligible for a credit or grant―either as direct recipients or as investors in other eligible firms.

To qualify for the program, a firm must have 250 or fewer full-time and part-time employees. Leased employees are not counted for this purpose. The 250-employee-limit applies to the members of a controlled group of corporations, as well as partnerships and proprietorships under common control, as if they were a single employer.

Firms do not need to generate taxable income in order to benefit from this program. Unlike the research and development tax credit, for example, eligible firms that are not yet operating at a profit can qualify for a grant in lieu of the tax credit.

Because pass-through entities such as partnerships and S corporations qualify for the credit, their investors can benefit from the credit on their personal income tax returns. And, also unlike the research and development tax credit, the alternative minimum tax (AMT) does not limit the potential tax benefit.

Qualifying Projects
The determination that a project qualifies under the program is made by the U.S. Treasury Department/Internal Revenue Service (IRS) in collaboration with the U.S. Department of Health and Human Services (HHS) based on the following requirements.

HHS must determine that the project is a qualifying therapeutic discovery project, designed for any of the following purposes:

  to treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies, or carrying out research protocols

   to diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions

  to develop a product, process, or technology to further the delivery or administration of therapeutics

HHS must also determine that the project demonstrates a reasonable potential to achieve one or more of the following benefits:

  produce new therapies that treat areas of unmet medical needs or prevent, detect or treat chronic or acute diseases and conditions

  reduce the long-term growth of health care costs in the United States

  significantly advance the goal of curing cancer within the next 30 years

The IRS must determine that the project is among those with the greatest potential to directly or indirectly create and sustain high-quality, high-paying jobs in the United States and to advance the nation's competitiveness in the life, biological, and medical sciences.

Qualified Investments
For each qualifying therapeutic discovery project selected by the IRS and HHS, the IRS must certify the qualified investment amount. The credit/grant covers investments in qualifying projects made in tax years beginning in 2009 and 2010.

The qualified investment for either tax year is equal to "the aggregate amount of costs paid or incurred in the taxable year for expenses necessary for and directly related to the conduct of a qualifying discovery project." It is limited by the amount certified as eligible under the program―up to a maximum credit/grant per firm of $5,000,000, on qualifying costs of $10,000,000. It is also generally reduced by the amount of any grants the firm receives that are excludable from taxable income.

Qualified expenditures do not include the following:

  compensation or other remuneration for the firm's chief executive officer and its four highest compensated officers (excluding the CEO)

  interest expense

  facility maintenance expenses

  service costs, including certain indirect and general and administrative costs incurred by or for service functions such as accounting, legal, human resources, and security departments 

In addition, qualified expenditures are not eligible for certain other tax benefits, such as bonus depreciation or the orphan drug credit.

Application Process
The appendices of IRS Notice 2010-45 describe, in detail, the content and format of information that must be provided by an eligible biotech firm applying for certification.

Each project requires its own signed and dated application, accompanied by a penalty-of-perjury statement. In general, the submission must include the following materials:

  a Project Information Memorandum prepared as mandated by the IRS

  a completed IRS Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program (Form 8942 will be made available on the IRS website no later than June 21, 2010. The form will include the election to apply for a grant rather than a tax credit.)

  a properly executed Consent to Public Disclosure of Certain Qualifying Therapeutic Discovery Project Program Application Information form, if the firm elects to consent to certain limited disclosures

The IRS advises applicants "to submit complete and fully responsive applications" as the IRS and HHS expect to make their determinations "without any further exchanges or discussions with the applicant."

Applicants will be notified by October 29, 2010.

Application Period

Completed applications must be filed no later than July 21, 2010, to be considered for the primary allocation round. If any of the billion-dollar pool remains unallocated at the conclusion of the primary round, there may be another, subsequent round to allocate the residual funds.

	Next Article
Back to Articles