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Updated July 7, 2010
Q. What is the Qualifying Therapeutic Discovery Project tax credit?
A. The Qualifying Therapeutic Discovery Project tax credit is provided under new section 48D of the Internal Revenue Code (IRC), enacted as part of the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148). The credit is a tax benefit targeted to therapeutic discovery projects that show a reasonable potential to:
- Result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute diseases and conditions,
- Reduce the long-term growth of health care costs in the United States, or
- Significantly advance the goal of curing cancer within 30 years.
Allocation of the credit will also take into consideration which projects show the greatest potential to create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life, biological and medical sciences.
The credit is only available to taxpayers with no more than 250 employees. The credit covers up to 50 percent of a taxpayer’s qualified investment. To provide an immediate boost to U.S. biomedical research, the credit is available for qualified investments made or to be made in 2009 and 2010. To claim the credit, a taxpayer must apply for certification of its qualified investments. The amount of the credit which a taxpayer may be allocated will be limited to a maximum of $5 million per taxpayer, and the total amount of credits available to all taxpayers is limited to $1 billion.
Q. Is the $5 million limit per applicant a $5 million per year limitation or is it the total amount an applicant can receive?
A. The $5 million is the total amount an "eligible taxpayer” can receive from this program. (7/7/10)
Q. What is the application and certification process?
A. IRS Notice 2010-45, released on May 21, 2010, describes the process by which taxpayers can apply to have a therapeutic discovery project certified as eligible for a credit or grant. The application form will be available no later than June 21, 2010, and applications must be postmarked no later than July 21, 2010. In addition to the application form, the application must include a Project Information Memorandum in the form described in Appendix A to Notice 2010-45. The IRS will issue certifications by October 29, 2010. See Notice 2010-45 § 5.
Q. How do I apply? Is there a form available?
A. To apply, use Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program (Catalog Number 37748D). See Notice 2010-45 § 6. Form 8942 will be available on the IRS website no later than June 21, 2010. You must also include a Project Information Memorandum in the form described in Appendix A to Notice 2010-45.
Q. Can I apply for a grant in lieu of the credit?
A. Yes, generally, taxpayers may elect to receive a grant in lieu of the credit. However, grants cannot be made to federal, state or local governments, any organization described in IRC section 501(c) that is exempt from tax under IRC section 501(a), any entity referred to in IRC section 54(j) or any partnership or pass-through entity that has any of these types of entities as a partner or holder of an interest. See Notice 2010-45 § 8.03(7).
Additional detail on applying for a grant in lieu of the tax credit is provided in Notice 2010-45 § 8.02.
Q. Will there be any advantage to submitting an application early in the process (e.g., June 21, 2010) rather than later in the process (e.g,, on July 21, 2010)?
A. No. All applications must be postmarked no later than July 21, 2010. While the IRS encourages applicants to submit applications as soon as they are completed, applications filed early in the filing window will not obtain any advantage in the evaluation process relative to those filed later in the filing window.
Q. Which taxpayers can apply for the tax credit or grant?
A. The credit or grant is only available to taxpayers who are engaged in a trade or business and have no more than 250 employees (including both full-time and part-time employees). See Notice 2010-45 § 4.03.
C corporations, S corporations, limited liability companies (LLCs), partnerships and individuals who file Schedule C can apply for either the tax credit or the grant. See Notice 2010-45 § 4.03.
However, grants cannot be made to federal, state or local governments, any organization described in IRC section 501(c) that is exempt from tax under IRC section 501(a), any entity referred to in IRC section 54(j) or any partnership or pass-through entity that has any of these types of entities as a partner or holder of an interest. See Notice 2010-45 § 8.03(7).
Q. What kinds of qualifying therapeutic discovery projects are eligible?
A. The Department of Health and Human Services (HHS) will determine whether an applicant's project is a “qualifying therapeutic discovery project.” See Notice 2010-45 § 5.01(1). IRC section 48D describes qualifying projects as those designed:
- To treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies or carrying out research protocols, for the purpose of securing Food and Drug Administration approval of a product,
- To diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions, or
- To develop a product, process or technology to further the delivery or administration of therapeutics.
Q. What is a "qualified investment"?
A. In general, a qualified investment is the aggregate amount of the costs paid or incurred that are directly related to the qualifying therapeutic discovery project. Qualified investment only includes investments made in a taxable year beginning in 2009 or 2010. See Notice 2010-45 § 4.01. Thus, qualified investment may include both amounts already paid or incurred and amounts that have not yet been paid or incurred as of the time an applicant files its application, so long as all such amounts are paid or incurred in a taxable year beginning in 2009 or 2010.
Q. What types of costs are not eligible to be qualified investments?
A. The following types of costs may not be included in the qualified investment for any taxable year with respect to any qualifying therapeutic discovery project:
- Remuneration for an employee described in IRC section 162(m)(3),
- Interest expenses,
- Facility maintenance expenses, and
- Any cost identified as a service cost under Treas. Reg. section 1.263A-1(e)(4).
In addition, the amount of a taxpayer's qualified investment must be reduced by the amount of any grant excluded from the taxpayer's gross income under IRC section 61, unless the grant can only be used for costs not included in the definition of a qualified investment.
See Notice 2010-45 § 4.01(3).
Q. What costs are "facility maintenance expenses?"
A. The term facility maintenance expenses means any costs paid or incurred to maintain a facility, including:
- Mortgage or rent payments,
- Insurance payments,
- Utility and maintenance costs, and
- Costs of employment of maintenance personnel
See Notice 2010-45 § 4.04.
Q. Can a company apply for the new credit or grant for a project for which the company is already receiving other grant money (e.g., an SBIR award), or does the project have to be completely self-funded to qualify?
A. A taxpayer must reduce the amount of a project’s qualified investment for any grant that is not included in gross income, unless the grant can only be used for costs not included in the definition of a qualified investment. See Notice 2010-45 § 4.01(4).
Q. Can an eligible taxpayer apply to receive the credit or grant for more than one project?
A. Yes, but a taxpayer must file a separate application for each project for which it seeks certification. See Notice 2010-45 § 6.01.
Q. Is there a limit on how much credit or grant a taxpayer may receive?
A. The IRS will not certify more than $10 million of qualified investment for any single taxpayer, and no taxpayer will be allocated more than $5 million in credits or grants for 2009 and 2010, regardless of the number of projects for which a taxpayer applies. See Notice 2010-45 § 5.02(7).
Q. Who approves or rejects the application? How will applications be evaluated and certifications be awarded?
A. The IRS will consider certification of a project’s qualified investment after HHS determines that:
- The project meets one or more of the criteria for treatment as a qualifying therapeutic discovery project and
- The project shows reasonable potential
- To result in new therapies
- To treat areas of unmet medical needs, or
- To prevent, detect, or treat chronic or acute diseases and conditions
- To reduce long-term health care costs in the U.S., or
- To significantly advance the goal of curing cancer within 30 years.
- To result in new therapies
After HHS has determined which projects meet these requirements, the IRS will issue certifications, taking into consideration which of those projects have the greatest potential to:
- Create and sustain (directly or indirectly) high quality, high-paying jobs in the United States, and
- Advance U.S. competitiveness in the fields of life, biological, and medical sciences.
See Notice 2010-45 § 5.01. The IRS will certify an equal amount of qualified investment for each project that meets those certification requirements, subject to certain limits. See Notice 2010-45 § 5.02(5) and (7). For further information about the evaluation criteria, see Appendix A of Notice 2010-45.
Q. I have heard that the IRS/HHS will select appropriate projects and then distribute the credit and grant monies equally, up to the limit of 50% of the taxpayer’s qualified investment, meaning that even though a company might qualify for a credit or grant of $2 million (for a project with $4 million in qualified investment), the amount that the company is allocated could be substantially less, depending how many projects are approved. Is this true?
A. Yes. The amount of qualified investment certified for each project that the IRS and HHS determine should receive certification will be subject to several limits:
- The aggregate limit of qualified investment that will be certified will not exceed $2 billion. Certification will initially be made in equal shares among all projects that meet the certification requirements.
- No project will receive certification of an amount greater than its qualified investment.
- No taxpayer will receive certification of more than $10 million in qualified investment, regardless of the number of project that taxpayer sponsors.
See Notice 2010-45 § 5.02(5) and (7).
Q. Where should I look to find more information about this provision?
A. Notice 2010-45, released May 21, 2010, established the Qualifying Therapeutic Discovery Project credit or grant program and contains detailed information on the application procedures for certification of qualified investments.