Biotech companies have been awaiting IRS implementation of the Qualified Therapeutic Discovery Project Program since its enactment as part of the Patient Protection and Affordable Health Care Act earlier this year. On May 21, 2010, the IRS released Notice 2010-45, which provides taxpayers with guidance for applying for federal income tax credits or outright grants under the program.

The Notice establishes the process by which taxpayers can apply to have their projects certified as eligible for the credits or grants. The application process begins on June 21, 2010, and all applications must be postmarked by July 21, 2010.

Before the program was added to the Internal Revenue Code, the only tax credits available for medical research programs were the (i) research credit and (ii) orphan drug credit.  Consequently, the new program offers a substantial financial benefit to biotech companies that have implemented or are considering investment in certain research projects.

Overview of the Program

  • The credit is available for the 2009 and 2010 tax years and is equal to 50 percent of an eligible taxpayer’s qualifying investment in a therapeutic discovery project.

  • Eligible taxpayers may apply to receive a grant in lieu of a tax credit. Because the credit is nonrefundable, the grant is likely to be more valuable to startup businesses with current tax losses.

  • Only taxpayers with 250 or fewer employees are eligible for the credit. Governmental entities, tax-exempt organizations, and certain partnerships and other pass-through entities are ineligible for the credit or grant.

  • A qualifying project must be designed to develop a product or therapy to diagnose, treat, or prevent diseases by (1) conducting preclinical activities, clinical trials, clinical studies, and research protocols, or (2) developing technology or products designed to diagnose diseases and conditions or to further the delivery or administration of therapeutics.

  • The total credits and grants under the program may not exceed $1 billion for the two-year period.

Application Process

  • The IRS plans to have the applications (IRS Forms 8942) available in June, before the application process begins on June 21. The same application will apparently be used for credits and grants.

  • The applications will consist of three parts: (1) IRS Form 8942, which will request basic information about the taxpayer, (2) a “Project Information Memorandum,” and (3) if applicable, a consent to public disclosure.

  • The Project Information Memorandum will include the technical information about the project and information about the scientific rationale of the project.

  • The maximum credit or grant that one taxpayer can obtain is $5 million.

  • Applicants will receive a determination as to whether they qualify and the amount of the credit or grant they will receive by October 29, 2010.

Ballard Spahr LLP will continue to monitor the application process and developments in this area. Companies that wish to apply for credits or grants should prepare now for the application process. Our attorneys are available to assist in evaluating their eligibility for a credit or grant and in preparing the applications. For further information, please feel free to contact Douglas M. Fox, 410.528.5505 or foxd@ballardspahr.com; Wayne R. Strasbaugh, 215.864.8328 or strasbaugh@ballardspahr.com.


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