Known as the "qualifying therapeutic discovery project credit," the Credit/Cash Grant program is limited to $1 billion and is only available for taxable years beginning in 2009 and 2010. The Secretary of the Treasury (the "Secretary") has until May 22, 2010 to establish a program to consider and award certifications to qualifying therapeutic discovery project sponsors. Because it will be a competitive application process, eligible biotech companies will need to move quickly and submit their applications promptly once the Treasury Department issues guidance on the program. Since the Credit/Cash Grant program includes eligible costs incurred in 2009, biotech companies should review their 2009 costs now so that they have the data to complete their applications as soon as program details are released.

Overview of the Credit

Qualifying therapeutic discovery project. The Credit consists of 50 percent of certain expenses paid or incurred by an eligible taxpayer in taxable years beginning in 2009 and 2010 with respect to any "qualifying therapeutic discovery project." A "qualifying therapeutic discovery project" is a project that is designed either:

• To treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of securing approval of a product under section 505(b) of the Food, Drug, and Cosmetic Act, or section 351(a) of the Public Health Service Act
• To diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions
• To develop a product, process or technology to further the delivery or administration of therapeutics

Eligible expenses. Expenses eligible for the Credit are those costs paid or incurred during the taxable year for expenses necessary for and directly related to the conduct of the qualifying therapeutic discovery project, but not in excess of the amount certified by the Secretary as eligible for the Credit. Expenses that are not eligible for the Credit include: any cost for compensation paid to certain high-level executives of a public company, interest expenses, facility maintenance expenses (mortgage or rent payments, insurance payments, utility and maintenance costs, and the cost of maintenance personnel), and so-called "service costs" (departments such as personnel, accounting, data processing, security, legal and other similar departments). The Secretary may also determine other expenses that are not eligible for the credit.

Eligible taxpayer. An "eligible taxpayer" is any taxpayer that employs not more than 250 employees in all businesses of the taxpayer. All employees within a controlled or affiliated group are counted, as are employees within an affiliated service group for qualified plan purposes. For this reason, some small companies with joint operating arrangements with large pharmaceutical companies may not be eligible.

Cash Grant Option

Many biotech companies have net operating loss carryforwards and therefore will be unable to make immediate use of the Credit. Section 48D allows any eligible taxpayer who applies for certification to elect to receive a Cash Grant in lieu of the Credit amount. As with the Credit, Cash Grants are available only for eligible expenses paid or incurred in taxable years beginning in 2009 and 2010. Cash Grants must be paid by the Treasury Department to the applicant during the 30-day period beginning on the later to occur of the date of the application for the Cash Grant, or the date the eligible expenses are incurred. Cash Grants are not subject to income tax.

Ineligible Taxpayers

Certain taxpayers are not eligible for the Credit or a Cash Grant. These include any federal, state or local government, any tax-exempt organization under section 501(c) of the Code, and certain foreign entities. In addition, any partnership or other pass-through entity of which any of the foregoing is a partner or other holder of an equity or profits interest is ineligible for the Cash Grant; however, it may be eligible for the Credit. The partnership rule means that biotech companies who partner with, or who grant a profits interest to, governmental or tax-exempt entities such as universities, will be ineligible for the Cash Grant, but may be eligible for the Credit.

Certification Process

An aggregate of $1 billion in Credits and Cash Grants will be available under the program. To qualify, taxpayers must apply to the Secretary under an application and certification program which the Secretary, in consultation with the Secretary of Health and Human Services, is required to adopt on or before May 22, 2010.

In determining which qualifying therapeutic discovery projects will be awarded Credits or Cash Grants, the Secretary must take into consideration only those projects that show reasonable potential to:

• Result in new therapies that either
  • Treat areas of unmet medical need; or 
  • Prevent, detect or treat chronic or acute diseases and conditions
• Reduce long-term health care costs in the United States; or
• Significantly advance the goal of curing cancer within the next 30 years

Additionally, the Secretary must take into consideration which projects have the greatest potential (1) to create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States, and (2) to advance United States competitiveness in the fields of life, biological and medical sciences.

Each applicant for certification must submit an application containing the information required by the Secretary. The Secretary must take action to approve or deny an application within 30 days of the submission of the application. An application may request an allocation of Credits or Cash Grants for both 2009 and 2010.

Until the Secretary establishes the program and provides more details on the application and selection process, it is not known whether certification will be on a first-come, first-served basis, or some other, more selective basis.

Because the program will be administered under a competitive application process, eligible biotech companies will need to move quickly and submit their applications promptly once the Treasury Department releases details of the program. A similar program for manufacturers of renewable energy property was oversubscribed, and credit availability was exhausted very soon after the program was adopted.

Special Rules

Section 48D contains special rules regarding the interplay of the Credit with other sections of the Code, such as bonus depreciation and the research credit in order to prevent a taxpayer from receiving a double tax benefit. Also, if a Credit or Cash Grant is allowed with respect to depreciable property, the taxpayer must reduce the basis of depreciable property by the full amount of the Credit/Cash Grant. Both the Credit and the Cash Grant are subject to recapture if the technology or other property created as a result of the qualifying therapeutic discovery project is transferred within five years.

Guidance on Application Process To Be Forthcoming

We anticipate that the Treasury Department will issue a notice in the near future that will establish the Credit/Cash Grant program and announce the procedure for applying for Credits and Cash Grants. Reed Smith will issue another Client Alert as soon as details of the application process are released.

If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors, or the Reed Smith attorney with whom you regularly work.

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