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Tax Credit for Pioneering Biotech Projects

$1 billion will be awarded as part of Obama’s health plan

With a big boost from a new tax credit, many small companies with projects that strive to diagnose, treat or prevent illnesses will be able to further advance their efforts under an initiative announced on May 21 by the U.S. Treasury Department. The program is part of President Barack Obama’s Patient Protection and Affordable Care Act. Similar to the Advanced Energy Manufacturing Tax Credit Program announced during the third quarter of 2009, this tax credit program is expected to be very competitive, and the available $1 billion in tax credits/grants is expected to be allocated in short order.

The Qualified Therapeutic Discovery Project Credits will award approved, certified applicants with a tax break equal to 50 percent of the amount of the business’ qualified investment. The tax credit is especially attractive because businesses can elect to receive a cash grant in lieu of the tax credit, an advantage that is particularly appealing to businesses with little or no tax liability in 2009 and 2010.

The regulations will apply to small businesses with 250 or fewer full- or part-time employees (leased employees are not included) that have made or will make qualified investments directly related to certain therapeutic discovery projects completed in 2009 or that are currently underway.

Which projects qualify?

A qualifying therapeutic discovery project is a project designed to develop a product, process or therapy to diagnose, treat or prevent diseases and afflictions by (a) conducting pre-clinical activities, clinical trials, clinical studies and research protocols or (b) developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.

Which expenses count?

To qualify, investment amounts must have been paid or incurred after December 31, 2008. Expenses that are necessary for and directly related to the conduct of a given qualified therapeutic discovery project, in the aggregate, constitute the qualified investment for such project. (Businesses may elect to include expenditures related to depreciable property in the qualified investment, but, if doing so, must reduce the tax basis for the property by the amount of the credit.)

Which expenses don’t count?

The Treasury Secretary has the final say on which expenses are applicable, but several potential claims that will not make the cut have been announced. Compensation paid to the chief executive officer and the four highest-paid employees other than the chief executive officer are not included in qualifying expenses. Interest payments, facility maintenance expenses, service costs (including indirect costs that can be identified with a service department or function such as personnel, accounting, data processing, legal or similar departments), or that directly benefit or are incurred by reason of a service department or function don’t count.

What are the selection criteria?

Projects that meet the eligibility requirements described above will be evaluated for potential selection and certification. Additional criteria will guide this selection process. For example, under scrutiny will be a project’s reasonable potential to result in new therapies to treat areas of unmet medical need; or to prevent, detect or treat chronic or acute disease conditions. A strong candidate will also show promise of reducing long-term healthcare costs in the United States; or significantly advance the goal of curing cancer within a 30-year period beginning on May 21, 2010.

Additionally, preference will be given to projects with the greatest likelihood of creating and sustaining (directly or indirectly) high-quality, high-paying jobs in the United States. In the same vein, assessors will study a project’s likelihood of advancing the United States’ competitiveness in the fields of life, biological and medical sciences.

I’m interested. What are the next steps?

Applications for certification will be released no later than June 21, 2010. Separate applications must be submitted for each qualifying project. Completed applications will include Form 8942, an attached Project Information Memorandum and a signed form for limited disclosure of project information if the applicant elects to provide consent for such disclosures.

Completed applications must be postmarked no later than July 21, 2010. The review of applications will end on September 30, 2010, and decisions on applications will occur no later than October 29, 2010.

The maximum amount of credits or grants that may be allocated to a single taxpayer in the aggregate for 2009 and 2010, regardless of the number of applications submitted, is $5 million. If any portion of the $1 billon available under the program remains unallocated after the initial allocation round, one or more additional allocation rounds may be conducted.

Given the time-sensitive, competitive nature of the tax credit, it is important to act quickly if you are interested in the program. Please contact any of the following individuals if you have questions about this program, what types of projects may qualify, what costs may apply or any other federal or state incentive-based financing questions.

  • Partner

    Jeremy is a member of the Business Services department, and he focuses his practice in the area of emerging business and financial institutions. Clients turn to him for a range of legal services, especially mergers and acquisitions ...

  • Partner

    Matt Troyer counsels clients in numerous areas of corporate and real estate law. As corporate counsel, Mr. Troyer routinely advises owners of, and executives within, privately held businesses on a wide range of matters and ...

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