Small biotech companies are poised to benefit significantly from a provision included in the Patient Protection and Affordable Care Act (H.R. 3590), signed into law by President Obama March 23, 2010. Designed to encourage investment in new therapies, the new "therapeutic discovery project tax credit" provides a 50-percent credit (or a grant for the same amount) for qualifying investments made during 2009 and 2010. Because the provision allocates a set amount ($1 billion) for qualifying taxpayers, there is an inherent competitive nature to the credit, and it is incumbent upon companies to properly document eligibility for obtaining the new provision in a timely fashion.
Present law provides for a 50-percent credit for expenses related to human clinical testing of drugs for the treatment of certain rare diseases and conditions (Section 45C of the Internal Revenue Code). There is no credit specifically designed to encourage investment in new therapies relating to diseases.
H.R. 3590 establishes a 50-percent nonrefundable investment tax credit for investments in qualifying therapeutic discovery projects for companies having 250 or fewer employees, determined taking into account all businesses of the taxpayer at the time it submits an application to obtain certification for qualifying investments.
Calculation of the credit
The credit or grant is calculated by multiplying 50 percent against "qualified investments" in "qualified therapeutic discovery projects."
Qualified Therapeutic Discovery Project
A "qualified therapeutic discovery project" means a project that is designed to:
Only those expenses incurred in the taxable year that are "necessary for and directly related to" the conduct of a qualifying therapeutic discovery project are considered qualified investments. As such, costs related to, among other things, remuneration for an employee described in section 162(m)(3), interest expense, or facility maintenance expenses, are not included.
Observation: For purposes of determining other costs not subject to the credit, the provision includes a broad category of "any other expenditure as determined by the Secretary as appropriate to carry out the purposes of the provision."
Grant in lieu of credit
Taxpayers that are unable to claim the credit may instead avail themselves of a provision in the bill which authorizes the Secretary of the Treasury to provide a grant in lieu of the credit, which would not be includible in the taxpayer's gross income.
Observation: For start-up or other firms not able to utilize a tax credit due to the absence of tax liability, the grant component of the new credit provides an immediate benefit that would otherwise have been unavailable.
Eligible taxpayers must demonstrate their justification for the credit through a formal certification process. In that regard, in determining the qualifying therapeutic discovery projects with respect to which qualified investments may be certified, the Secretary will take into consideration only those projects that show reasonable potential to (1) result in new therapies to (i) treat areas of unmet medical need or (ii) prevent, detect, or treat chronic or acute diseases and conditions; (2) reduce long-term health care costs in the United States; or (3) significantly advance the goal of curing cancer within the next 30 years.
In addition, the Secretary shall take into account which projects have the greatest potential to (i) create and sustain (directly or indirectly) high quality, high paying jobs in the United States; and (ii) advance the United States' competitiveness in the fields of life, biological, and medical sciences.
Interplay with other tax credits under the Internal Revenue Code
Companies that claim the credit would not be able to claim the section 41 research credit the orphan drug credit, or bonus depreciation for the same expenses. To the extent expenses incurred in 2009 were considered in determining research credits and subsequently also became the basis of a therapeutic tax credit/grant, an amended return for that year may be necessary to reduce associated credits.
For further information
Text of HR 3590