The Patient Protection and Affordable Care Act of 2010 (the “Act”), enacted as part of national health care reform legislation, allocated $1 billion in the form of a new investment credit (the “Therapeutic Credit”) and grant in lieu of the Therapeutic Credit (“Grant”) for investments made by small businesses for research or other medical innovation.
The Qualifying Therapeutic Discovery Project Program (the “Program”) allows a business with no more than 250 employees to claim the Therapeutic Credit or receive a Grant equal to 50 percent of its investment in certain health care projects in 2009 and 2010, up to a maximum of $5 million. Investments must be certified by the Internal Revenue Service (IRS) in order to be eligible for the Therapeutic Credit or Grant.
Applications must be submitted by July 21, 2010, in order to be eligible for the first (and potentially only) round of certifications. The Therapeutic Credit and Grant are subject to the special rules of the Internal Revenue Code applicable to investment credits.
Details of the Therapeutic Credit
The Therapeutic Credit is available for 50 percent of the amount of a “qualified investment” in a “qualifying therapeutic discovery project” that is designed to develop a product, process, or therapy to diagnose, treat, or prevent diseases or other medical conditions, including:
- Conducting preclinical activities, clinical trials, clinical studies, and research protocols for therapeutic products or processes;
- Determining molecular factors related to diseases or conditions or developing molecular diagnostics to guide therapeutic decisions; and
- Furthering the administration of therapeutics.
A “qualified investment” in such a project is equal to the total costs paid or incurred in a tax year beginning in 2009 or 2010 for expenses that are necessary for, and directly related to, the conduct of the project, less any excluded costs (such as compensation for certain officers, interest expense, and facility maintenance expenses).
A business is eligible to participate in the Program only if it has 250 or fewer full-time and part-time employees.
Before a business can claim the Therapeutic Credit, it must submit an application for certification of its projects and expenses to the IRS. The application consists of the following:
- A completed IRS Form 8942 (available on the IRS website); and
- A Project Information Memorandum that describes the project in detail (available on the U.S. Department of Health and Human Services (HHS) website); and
- Consent to public disclosure (if the applicant chooses to allow certain limited disclosure of its project).
The IRS will certify that an applicant’s program is a qualified investment under the Program only if:
- HHS determines from its review of the Project Information Memorandum that the described program is a qualifying therapeutic discovery project;
- HHS determines that such project shows reasonable potential to: (a) result in a new therapy to treat areas of unmet medical need or to prevent, detect, or treat a chronic or acute disease or condition; (b) reduce long-term health care costs in the United States; or (c) significantly advance the goal of curing cancer within 30 years; and
- The IRS determines that such project is among those that have the greatest potential to create and sustain high-quality, high-paying jobs in the United States and to advance U.S. competitiveness in the sciences.
A separate application must be filed for each project for which the business is requesting certification as a qualified investment under the Program.
Applications for the first round of certifications by the IRS must be postmarked by July 21, 2010. The IRS will approve or deny all applications for certification by Oct. 29, 2010. The IRS will not certify more than $10 million of qualified investments per taxpayer.
If any funds under the Program remain available after the initial round of certifications, the IRS will conduct additional rounds until all the funds are allocated. Additional information about the application process can be found in IRS Notice 2010-45.
Receiving a Grant instead of a Tax Credit
A business other than a tax-exempt organization may choose to receive a Grant instead of the Therapeutic Credit by making an affirmative election on Form 8942. This option could benefit a start-up business or other entity that cannot immediately use a tax credit.
If a business submits applications under the Program for more than one project, it must make the Grant election on a project-by-project basis on each Form 8942 that is submitted. An eligible applicant that has received a certification for the Therapeutic Credit may request a Grant in lieu of the credit by filing an amended Form 8942.
For more information please contact
, or your Davis Wright Tremaine attorney.