On June 18, 2010, the Internal Revenue Service (IRS) released the application forms to apply for the investment tax credit or grant for certain therapeutic discovery projects. This program includes a tight deadline for applications, so eligible taxpayers must act quickly to assess potential eligible projects and apply for the Federal subsidy.

Tax Credit/Cash Grant 

The Health Care and Education Reconciliation Act of 2010 (the Act) added a new nonrefundable investment tax credit for qualified investments in qualifying therapeutic discovery projects. ¹ The provision allocates $1 billion during the two-year period 2009 through 2010 for the program. IRS in consultation with the Secretary of Health and Human Services (HHS) will award certifications for qualified investments.

The amount of the credit generally equals 50 percent of qualified investments in qualifying therapeutic discovery projects.² The total amount of credits that the IRS may allocate under the program cannot exceed $1 billion for the 2-year period beginning with 2009.

For purposes of the credit, 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: (1) conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or (2) by 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. ³ The “qualified investment” for a tax year is the aggregate amount of the costs paid or incurred in the taxpayer’s 2009 and 2010 tax years for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project, excluding certain “soft” costs such as interest and certain executive compensation. The costs must satisfy certification and timing requirements. The amount treated as qualified investment for all tax years for any qualifying therapeutic discovery project may not exceed the amount certified by IRS as eligible for the credit. ⁴    

The credit is available only to companies having 250 or fewer employees.⁵ Special rules aggregate certain affiliate companies for purposes of the 250-employee limit.

In lieu of receiving the credit against tax liability, the Act creates a mechanism to allow the taxpayer to receive a cash grant equal to 50 percent of the qualified investment.⁶ The grant would be advantageous for taxpayers who have net operating losses or otherwise could not take full advantage of the credit to reduce their Federal income tax liability. The grant is not available for certain governmental entities, tax-exempt entities, issuers of clean renewable energy bonds or partnerships in which any of those entities are partners.

Certification Program

On June 18, 2010, the IRS released Form 8924, which is the application for eligible taxpayers to receive an allocation of the credit. Eligible taxpayers must submit an initial application by July 21, 2010, to be eligible for certification in the original round. The IRS has stated that it anticipates allocating all credits during this round of certification and that does not anticipate a need for further rounds of certification.

The application process involves two submissions, Form 8924 and a Project Information Memorandum (PIM). The Form 8924 solicits information regarding the applying taxpayer and the qualified expenditures. The PIM solicits information regarding the project itself, including confirming that the project would qualify as a qualifying therapeutic discovery project and identifying the project’s potential (a) to result in new therapies (i) to treat areas of unmet medical need, or (ii) to prevent, detect, or treat chronic or acute diseases and conditions, (b) to reduce long-term health care costs in the United States, or (c) to significantly advance the goal of curing cancer within the 30-year period beginning on May 21, 2010. The National Institutes of Health will be responsible for evaluating the projects themselves.

A key feature of the PIM is its insistence on brevity. The longest response to any question permitted is 250 words. Many of the questions have 50-word response limits. Conveying to NIH the importance and effectiveness of the project within this wording limitation will be a challenge.

We have provided links to the Form 8924 and the PIM from the IRS’s website for your review.

Form 8924

http://www.irs.gov/pub/irs-pdf/f8942.pdf

PIM

http://grants.nih.gov/grants/funding/QTDP_PIM/QTDP_PIM.doc

Further information is available from the IRS’s website (http://www.irs.gov/newsroom/article/0,,id=224499,00.html) and the NIH website (http://grants.nih.gov/grants/funding/QTDP_PIM/index.htm#project).

Conclusion

Treasury officials have previously indicated that they anticipate a significant oversubscription of the program. The time window for applying for certification is short and Government officials expect significant competition for the allocation of this tax incentive. Given these dynamics, companies undertaking potentially eligible projects in 2009 and 2010 should immediately commence the application process.