Congress Enacts New Investment Tax Credit for Qualified Therapeutic Discovery Projects
Congress recently enacted the Patient Protection and Affordable Care Act—which includes a tax credit for 50% of qualified investments in qualifying therapeutic discovery projects. This legislation enables qualifying medical technology businesses to obtain up to $1,000,000,000 in tax credits for the 2009 and 2010 tax years. Funding for this tax credit is limited and due to timing considerations, medical technology companies should be prepared to act before the Treasury Secretary issues its program guidance later this spring. This alert outlines the criteria and procedures for obtaining the Qualifying Therapeutic Discovery Project Credit.
Qualification Requirements
In order to be eligible for the Qualifying Therapeutic Discovery Project Credit companies must:
- Not have more than 250 employees.
- Be working on a project that qualifies as a qualifying therapeutic discovery project that:
- Treats or prevents diseases or conditions by conducting pre-clinical activities, clinical trials, clinical studies, or carrying out research protocols for the purpose of securing FDA approval;
- Diagnoses diseases or conditions or determines molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
- Develops a product, process or technology to further delivery or administration of therapeutics.
In addition, the Qualifying Therapeutic Discovery Project Credit is only available for qualified investments. A qualified investment is the aggregate amount of the costs paid or incurred in that year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project. However a qualified investment cannot take into account excessive remuneration paid to employees (as defined in section 162(m) of the Internal Revenue Code), facility maintenance expenses, service costs (as defined in section 1.263A-1(e)(4) of the Code of Federal Regulations), or any other expenditure determined by the Treasury Secretary as appropriate to carry out the purposes of the provision.
Treasury Secretary Guidance Expected on or about May 21, 2010
The Treasury Secretary, in consultation with the Health and Human Services Secretary, is required to establish the Qualifying Therapeutic Discovery Project Credit program within 60 days of the Act’s passage. The credit’s provisions are modeled after an advanced energy manufacturer’s tax credit (Section 48C). Based on that model, taxpayers will likely have to wait for the Treasury Secretary to issue program guidance before applications will be considered. Once the Treasury issued its guidance on the 48C tax credit, applicants had only 30 days to submit their preliminary applications.
Potential Qualifying Therapeutic Discovery Project Credit applicants should begin preparations now because there is a limited amount of allocable credit funding and the application process will likely be competitive. Applicants may also maximize their credit by requesting an allocation of credits for both the 2009 and 2010 tax years.
Criteria for Qualification and Certification
The Treasury Secretary will only consider certifying therapeutic discovery projects as qualified investments if they show a reasonable potential to:
- Result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute diseases and conditions;
- Reduce long-term health care costs; or
- Significantly advance the goal of curing cancer within a 30-year period.
The Treasury Secretary is also expected to give additional consideration to those projects with the greatest potential to create and sustain (directly or indirectly) high-quality, high-paying U.S. jobs, and advance U.S. competitiveness in the fields of life, biological, and medical sciences.
Applicants may elect to receive Qualifying Therapeutic Discovery Project Credits that have been allocated to them in the form of Treasury grants equal to 50% of the qualifying investment; however the Treasury Secretary may require an accountant’s certification to attest to the accuracy of qualifying investments if an applicant elects a grant.
Recommendations for Medical Technology Companies
Because funding for the Qualifying Therapeutic Discovery Project Credit is limited and preliminary applications will likely be due 30 days after program guidance is issued, companies should start their preparations now. Prospective applicants should first determine how their qualifying discovery project will meet the Treasury Secretary’s criteria for qualification and certification. In addition, companies should assess their current and planned qualified investments for both the 2009 and 2010 tax years and determine whether it is in their best interest to elect a grant rather than a credit.
Contact Us
If you have questions about the content of this alert please contact Gina DeConcini at 612.607.7377; Patrice Kloss at 612.607.7360 or Barbara Wrigley at 612.607.7595.
This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.