May 24, 2010Client Alert

IRS Issues Guidance on Qualifying Therapeutic Discovery Project Tax Credit/Grant Program

In a previous client alert we discussed a provision in the 2010 Patient Protection and Affordable Care Act (the “Health Reform Bill”) that created a significant funding opportunity for small to midsize biotechnology companies, known as the Qualifying Therapeutic Discovery Project Credit. Please click here to view our previous alert titled, “Health Reform Offers Immediate Tax Credits and Grants to Biotech Industry,” from April 22, 2010. On Friday, May 21, 2010, the IRS issued additional guidance on the program that addresses the application and awarding process. This article discusses that additional guidance.

Brief Background

The program awards tax credits or grants in an amount up to 50% of qualified investments made by a company during its taxable years that begin in 2009 and 2010. A company with 250 or less employees that has made, or will soon make, investments in a qualifying project (defined in broad terms in the legislation) can elect to apply for either a tax credit or tax-free grant. Projects that have been terminated or suspended because of a failed (1) clinical trial, (2) pre-clinical research milestone or (3) FDA licensure are ineligible for this incentive.

Application Process

A primary allocation round will take place in the fall of 2010 for which applications are due by July 21, 2010. It is very likely that this round will be oversubscribed and, therefore, the only round. Applicants will be notified of whether their projects have been certified and, if so, the extent of the award by October 29, 2010. Applications can be submitted once the official IRS Form 8942 is released, which will be no later than June 21, 2010.

A single taxpayer can seek awards for multiple qualifying projects, but a separate application must be submitted for each project. An application for either credits or grants can cover investments made in each taxable year beginning in 2009 or 2010 separately, or a single application can cover both years. Since a large portion of most 2010 taxable years, and (for fiscal year companies) possibly a portion of the 2009 taxable year, will occur after the July submission deadline, the application can include all investments expected to be made within the eligible period and after the application is submitted. For expected costs that are certified but end up not being incurred, that portion of credits or grants will be recaptured for that taxable year. In addition, all awardees have an obligation to inform the IRS of any significant change with respect to information in its application. An applicant can amend its application to elect a grant at any time prior to its tax return being due for that taxable year.

The 2010 Grant Rule

The legislation stated that applications for 2010 grants could not be submitted until after the taxpayer’s 2010 taxable year had ended. Since the program was expected to be immediately oversubscribed and begin prior to 2011, this essentially eliminated any 2010 grants and created a de facto requirement to apply for grants covering investments in only 2009. However, the IRS compromised the language by allowing applications for grants covering costs incurred and expected during 2010 taxable years to be submitted by the July 21 deadline, but not considering them “effective” until after the last day of the taxpayer’s 2010 taxable year. In other words, 2010 grant applications can participate in the allocations of the initial round, but the company will not receive payment until the 30-day window immediately following the end of its 2010 taxable year.


No one taxpayer will be allocated any more than $5 million under the program, regardless of number of qualifying projects and qualified investments. If the $1 billion is not used by the pool of applicants from the July 21 deadline, one or more additional allocation rounds may be conducted.

Between the July 21 deadline and September 30, 2010 the IRS will preliminarily review all applications for completeness and whether the applicant meets the maximum employee requirement. Beginning October 1, the applications are sent to the Department of Health and Human Services (HHS) to determine whether a project meets the definition of a qualifying therapeutic discovery project and whether the project shows a reasonable potential to meet one or more of the scientific goals specified in the statute. After the HHS review, the IRS will further review those projects in light of the economic goals listed in the statute and, for each project that advances through both departments’ selection process, certify the submitted project costs that meet the definition of a qualified investment.

Awardees will be notified of their certification no later than October 29, 2010. Grants covering investments incurred in 2009 taxable years will be authorized for payment as of that date, and, as mentioned above, grants covering 2010 are authorized at the end of that taxable year. If the taxpayer amended its application in order to receive a grant, those deadlines will vary with the request.

Application Materials

IRS Form 8942 will be available on or before June 21, 2010, and will contain instructions on submitting the application. The guidance contained an appendix that: (1) describes the content and format of information to be submitted, (2) provides the series of questions that must be answered in a Project Information Memorandum (PIM) to be attached to the Form 8942, and (3) explains the evaluation criteria to be used by the IRS and HHS in the review process. A thorough and carefully drafted application is recommended as there is no opportunity to request a conference or appeal for any decisions made under this program.

Notably, it does not appear any professional certification, such as an accountant, is required for the application. Also, the reviewers are seeking concise statements in the PIM by directly giving the questions to be addressed and imposing size limits on the responses of either 50 or 250 words. HHS will analyze these answers based on the scientific rationale of the project, the current stage of development of the project and the evidence that the applicant has the capacity to bring the project to fruition. Because fully answering these questions can involve disclosing trade secrets and confidential or privileged information, applicants can insert language excluding portions of the application from Freedom of Information Act requests.

The IRS guidance can be viewed here.

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