The Qualifying Therapeutic Discovery Project Credit (QTDPC), enacted as section 48D of the Internal Revenue Code under the 2010 Health Care Act, provides a new business tax credit or grant in lieu of the credit for small companies that show significant potential to produce new cost-saving therapies, create U.S. jobs, and increase U.S. competitiveness. Businesses may receive a credit or grant of up to 50% of the cost of qualifying biomedical research. The total amount of credit or grants for the two-year period beginning 2009 is capped at $1 billion.
A QTDPC project is one that is designed to:
- Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, clinical studies, or carrying out research protocols for the purpose of seeking approval for a product under the Federal Food, Drug, and Cosmetic Act or section 515 of the Public Health Service Act;
- Diagnose diseases or conditions;
- Determine molecular diagnostics to guide therapeutic decisions; or
- Develop a product, process, or technology to further the delivery or administration of therapeutics.
Qualifying investments are the aggregate amount of expenses incurred in 2009 and 2010 per QTDPC project that are necessary and directly related to the project. Qualifying expenses do not include compensation for certain chief executive officers, interest expenses, facility maintenance expenses, certain service costs, and any other expenses determined by the IRS to be ineligible. Eligible businesses include those with fewer than 250 employees (including any affiliate employees).
How to certify a project for QTDPC
The process for applying for the QTDPC is set forth in IRS Notice 2010-45, which describes the criteria the IRS, in consultation with the Department of Health and Human Services (HHS), will apply to certify an applicant’s project. The credit is competitive in that only $1 billion in credit has been set aside for the two-year period beginning in 2009. Thus the aggregate amount of qualified investments that will be certified will be $2 billion and, applying the 50% limitation, results in a $1 billion credit cap. In addition, the IRS will not certify more than $10 million dollars as a qualified investment for any single applicant. This means that no applicant may receive more than $5 million in credits or grants for 2009 and 2010, regardless of the number of projects the applicant sponsors.
This potentially one-time program may be oversubscribed. However, Notice 2010-45 states that if a project would otherwise receive certification for an amount of qualified investment that exceeds the qualified investment described in the application, the unused certification amount will be apportioned equally among all other projects receiving a certification for only a portion of their qualified investments.
What project criteria are needed to be competitive
The IRS and HHS will be looking for applicants whose project shows:
- A reasonable potential to result in new therapies for diseases, or to prevent, detect, or treat chronic or acute conditions and diseases;
- Reduce health care costs, or
- Significantly advance a cure for cancer within a 30-year period;
- Have the greatest potential to create and sustain high-quality, high-paying jobs in the U.S.; and
- Advance the U.S.’s competitiveness in the fields of life, biological, and medical sciences.
The application process
Applicants must file a separate application for each project for certification on recently published IRS Form 8942, Application for Certification of Qualified Investments in Eligible Credits and Grants under the QTDPC Program, which is available online at www.irs.gov. The completed Form 8942 is due (that is, must be postmarked) no later than July 21, 2010. Preliminary review of timely filed applications will end on September 30, 2010. The IRS must approve or deny applications by October 1, 2010. Certification approvals or denials will be made by October 29, 2010.
Grants in lieu of the QTDPC
Applicants may elect on the Form 8942 to apply for a cash grant in lieu of the credit equal to 50% of its qualified investment. If an applicant submits an application for certification of a qualified investment made in both 2009 and 2010, then the applicant may apply for a grant for 2009 only, 2010 only, or both 2009 and 2010. QTDPC grants are not includible in the gross income. Also, grants are not available to any governmental entity or nonprofit entity, including a partnership or other pass-through entity in which a governmental or nonprofit entity has an equity or profits interest.
Both the QTDPC credit and grant are subject to the recapture rules under Section 50 of the Internal Revenue Code. Generally, credits are recaptured when credit property is disposed of, or ceases to be QTDPC property before the end of the 5-year recapture period. Credits are recaptured at 100% during the first full year after the property is placed in service. This percentage decreases by 20% every succeeding full year. No credit is recaptured after the fifth full year. In addition, similar recapture rules apply to grants. Thus, any increase in tax by reason of an investment ceasing to be a QTDPC property will be imposed on a business that receives a grant.
Unless a business is specifically looking for a tax offset, it appears that businesses lacking sufficient earnings to claim the credit, and start-up businesses that may not yet be entitled to claim the credit, will opt for the grant in lieu of the credit. It is also comforting to know that the IRS has already determined that the grant is not includible in gross income.