A new tax credit offers a limited number of smaller biotechnology companies a significant opportunity to obtain financing for new technology.  On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act of 2010 (the Act), which allocates $1 billion for a 50% tax credit for certain qualified investments, also known as the “qualifying therapeutic discovery project credit” (the Tax Credit).  The new law allows the 50% credit for qualified investment in a qualifying therapeutic discovery project.  Project sponsors are required to apply to the Treasury Department to have the amount of their qualified investment certified.  At the election of the taxpayer, it may receive a grant instead of a tax credit, allowing companies that are not yet profitable to obtain this same benefit.  The Tax Credit is only available for companies which apply for and are awarded the Tax Credit, and only for expenditures made during 2009 or 2010.     

Therapeutic Discovery Project Tax Credit: An Overview

Eligible Projects
To be a “qualifying therapeutic discovery project,” a project must do one of the following: 

1.       Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, with the purpose of receiving approval from the Food and Drug Administration or the Department of Health and Human Services;

2.       Diagnose diseases or conditions or determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or

3.       Develop a product, process, or technology to further the delivery or administration of therapeutics.

Eligible Taxpayers
To be eligible for the Tax Credit, a company must have no more than 250 employees at the time it files an application.  It is irrelevant how many employees a company had during 2009, even if the Tax Credit is for money expended in 2009.  Businesses under common control are considered a single company for purposes of this 250-employee limitation.

Eligible Expenditures
To be considered as a qualified investment, expenditures must be necessary for and directly related to the conduct of a qualifying therapeutic discovery project.  Certain expenditures are not eligible, such as compensation for certain high level executives; interest expenses; facility maintenance expenses; service costs, which include employees from departments such as accounting, data processing and other similar departments; and other expenditures to be identified by Treasury’s new Regulations. 

Selection Criteria
In choosing the projects to receive certification, the Treasury will only consider projects that show reasonable potential to do one of the following: 

1.       New Therapies – Result in new therapies to treat unmet medical needs or prevent, detect, or treat chronic or acute diseases and conditions.

2.       Reduce Costs – Reduce long-term health care costs in the United States.

3.       Curing Cancer – Significantly advance the goal of curing cancer over the next 30 years. 

Other considerations are whether the project can (i) create or sustain high quality jobs in the United States, or (ii) advance the United States’ competitiveness in the fields of life, biological, and medical sciences.  The Act does not indicate whether applications should be accepted on a first-come, first-served basis.  Presumably, speed in submitting applications will be an important factor for receiving certification, but so will a project’s ability to further these criteria. 

Review Timing
The Act requires the Secretaries of Treasury and Health and Human Services to create a qualifying therapeutic discovery project program to receive and review applications and award certifications. The Act requires the new program to accept or reject each application within 30 days of receiving it.

Next Steps 
Any company that is interested in applying for the Tax Credit should immediately begin collecting information for eligible projects.  The Act requires the Treasury to provide Regulations on the application process for certification by no later than May 22, 2010.  Companies are likely to begin submitting applications for certification shortly after the Treasury releases these Regulations.  It is unlikely that there will be enough funds for all of the eligible projects, so project sponsors that submit earlier applications may have an advantage in this process.  Time is of the essence.  If you have questions regarding whether you qualify for the Tax Credit, or need assistance with a certification application, please contact one of the attorneys listed.