The 2010 Patient Protection and Affordable Care Act (commonly referred to as the Health Reform Bill) has created a program of tax credits and tax-free grants to qualifying biotech firms. The program is designed to offer significant and near-immediate benefits to firms who have recently undertaken, or are on the verge of, project-specific biotech investments. If approved, a company will receive a tax credit or grant in the amount of 50% of qualified investments. However, the total amount of money available is capped at $1 billion – meaning companies need to apply for credits, and those acting quickly are most likely to be rewarded.
The firm must not employ more than 250 employees. For this purpose, employees of related companies, such as a parent and subsidiary, will be added together to determine the number of employees. In addition, 501(c)(3) and government entities are ineligible for grants, as well as any pass-through company (e.g., an LLC) in which they have an ownership interest.
Eligible projects are referred to as “Qualifying Therapeutic Discovery Projects” and defined as projects designed to:
- Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies, or carrying out research protocols, to secure approval of a drug or biological product;
- Diagnose diseases or conditions, including developing molecular diagnostics; or
- Develop a product, process or technology to further the delivery or administration of therapeutics.
The program defines “qualified investments” to be all expenses necessary for and directly related to the conduct of an eligible product that were made in a taxable year beginning in 2009 or 2010. Certain expenses specifically excluded from qualifying include the following: (i) executive compensation, (ii) interest expenses, (iii) rent/mortgage and related expenses, (iv) certain indirect costs (such as administrative overhead), and (v) expenses determined in the Secretary of Treasury’s discretion.
As noted below, the program is competitive, and eligible projects will be evaluated for whether they have reasonable potential to: (i) develop new therapies to treat areas of unmet medical needs or that relate to chronic or acute diseases and conditions, (ii) reduce long-term health care costs in the U.S., and (iii) significantly advance the goal of curing cancer within 30 years.
Projects that arguably meet one of such medical needs will be further evaluated to determine which have the greatest potential to create and sustain high quality, high-paying U.S. jobs and advance U.S. competitiveness in life, biological and medical sciences.
Tax Credit vs. Grant
An applicant must indicate whether it is seeking a tax credit (entity has tax liability exceeding 50% of the qualified investments) or a grant. The applications will likely otherwise be the same, except that one application for tax credits can cover qualified investments over both years, whereas a separate grant application needs to be made for 2009 and 2010.
The Secretaries of the Treasury and Health and Human Services are required to create an application for the program by May 21, 2010. Once the program is running, applications are to be reviewed within 30 days of submission. However, applications for grants covering qualified investments for the taxable year beginning in 2010 must be submitted between the first day following the end of that taxable year and before the company’s tax return is due, and in no event later than January 1, 2013. This limitation could result in the program exhausting its funding before it accepts any 2010 grant applications, and should be a consideration of applicants deciding whether to apply for a tax credit or grant. Again, a single application for tax credits can cover investments made over both fiscal years beginning in 2009 and 2010; in contrast, an applicant seeking grants for investments in both years would have to submit a separate application for each year and abide by the timing limitation described above for 2010 grants.
Given the $1 billion cap on funding for this program, not all eligible projects will receive funding and those applications first in line have the best chance of success. Interested companies should immediately begin evaluating projects that meet the program criteria and itemizing expenditures that meet the definition of a qualified investment. Applications should be as detailed as possible regarding the eligibility of the company, the project(s) and the investments.