06.25.10

Small Biotech Companies Have One Month to Scramble for $1 Billion of Income Tax Credit

Qualifying Therapeutic Discovery Project Credit (QTDPC)

Among the hundreds of pages that comprised the Patient Protection and Affordable Care Act, known by most as the “Health Care Bill”, was the creation of a 50% tax credit (or if elected, Federal nontaxable grant) aimed at small biotechnological companies called the qualifying therapeutic discovery project credit (IRC §48D). One billion dollars were set aside for eligible taxpayers that had qualifying therapeutic discovery projects (QTDP) for the 2009 and 2010 tax years. The catch? In order to be certified for an amount of tax credit or Federal nontaxable grant, applications need to be sent to the Internal Revenue Service postmarked no later than July 21, 2010.

Who is eligible for a QTDPC?

In order to apply for a QTDPC, an eligible taxpayer must:

• Be taxed as a C corporation, S corporation or partnership and have 250 or less employees (note that any employees of 50% or greater owners are aggregated with the eligible taxpayer employees for QTDPC purposes)
• Not be a government entity, non-profit taxpayer, clean renewable energy bond lender or an investor in any of those entities -and-
• Have made qualified investments in a QTDP.

What are qualifying investments in a QTDP?

Qualifying investments in a QTDP are costs paid or incurred for expenses directly related to and necessary for a QTDP in tax years 2009 or 2010. Such expenses not eligible for the QTDPC/Federal nontaxable grant are compensation for the five highest salaried officers, interest, rent, utilities, maintenance/cleaning, mortgage payments, service costs and any other indirect expenses deemed ineligible by the Internal Revenue Service.

What is a QTDP?

According to IRC §48D(c)(1) a QTDP is a project which is designed for any one of the following:

• Performing pre-clinical activities, clinical trials and studies or research protocols to treat or prevent diseases or conditions for securing approval of a product under §505(b) of the Federal Food, Drug and Cosmetic Act or §351(a) of the Public Health Service Act
• Developing molecular diagnostics to diagnose diseases and conditions or molecular factors related to diseases and conditions to guide therapeutic decisions -or-
• Developing a product, process or technology to further delivery or administration of therapeutics.

Which QTDPs will most likely be certified a tax credit or Federal grant?

Selection criteria has been established under IRC §48D(d)(3) for projects that will have the best potential to reap a tax credit or Federal grant. Such projects must show reasonable potential to:

• Result in new therapies to treat areas or unmet medical needs or to prevent, detect or treat chronic or acute diseases or conditions
• Reduce long-term health care costs in the United States -or-
• Advance significantly the goal of curing cancer by May 21, 2040.

In addition, the QTDP should show reasonable potential to:

• Create and sustain high quality, high-paying jobs in the United States -and-
• Advance United States competitiveness in life, biological and medical sciences.

How does an eligible taxpayer apply for a QTDPC or Federal nontaxable grant?

An eligible taxpayer must file the following for each QTDP:

• Form 8942 Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program. This form is available at http://www.irs.gov/pub/irs-pdf/f8942.pdf
• Form 2848 Power of Attorney, if necessary
• A completed Project Information Memorandum accessed from http://grants.nih.gov/grants/funding/QTDP_PIM/index.htm or IRS Notice 2010-45 at http://www.irs.gov/irb/2010-23_IRB/ar08.html -and-
• A completed Consent to Public Disclosure of Certain Qualifying Therapeutic Discovery Project Program Application (See Section 10.02 and Appendix B in IRS Notice 2010-45).

Note that any eligible taxpayer that receives a QTDPC or Federal nontaxable grant will be publically disclosed under the Freedom of Information Act.

If the eligible taxpayer is electing for a Federal nontaxable grant rather than a tax credit, the taxpayer must provide its Data Universal Numbering System (DUNS) number and register with Central Contractor Registration (CCR).

Applications must be postmarked on or before July 21, 2010 and sent to:

Internal Revenue Service
201 W. Rivercenter Boulevard
Stop 5701G
Covington, KY 41011

Are there any QTDPC limitations by eligible taxpayer?

According to IRS Notice 2010-45, the income tax credit or Federal nontaxable grant is limited to $5 million per eligible taxpayer.

What is the certification timeline?

All timely filed applications will have a preliminary review by the Internal Revenue Service with consultation from the Department of Health and Human Services through September 30, 2010. Applicants will receive a letter certifying or rejecting their application for a QTDPC or Federal grants no later than October 29, 2010. All decisions are final; there are no appeal or conference procedures.

How is the QTDPC calculated?

All direct expenses related to a QTDP are added back to taxable income for a qualifying taxpayer. Fifty percent of qualifying expenses will be treated as a nonrefundable income tax credit that can offset Federal income tax. The credit is limited to the amount certified by the Internal Revenue Service during the application process.

Any excess credit can be carried back to offset prior year Federal income taxes and then carried forward up to twenty years to offset future Federal income tax liability.

Note that any expenses that are calculated for the QTDPC cannot be duplicated when calculating an eligible taxpayer’s research and development (R&D) credit.

Joyce Robinson
Direct: (703) 770-6311
Email: jrobinson@argy.com

Michael Buckley
Direct: (703) 770-6328
Email: mbuckley@argy.com

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