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TAX CREDIT OR GRANT FOR INVESTMENTS IN LIFE SCIENCE RESEARCH AVAILABLE UNDER THE HEALTH CARE REFORM ACT
March 31, 2010On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (P.L. 111-148), generally referred to as the Health Reform Overhaul Act. §9023 of the Act includes an incredible one-time opportunity for many life sciences companies by establishing a tax credit (or grant for firms with no tax liabilities). The credit or grant is for 50 percent of an investment made by a business with less than 250 employees for tax years 2009 and 2010 in a qualifying Therapeutic Discovery Project.
How will the program work? What are its essential features? The credit and grant program is capped at $1 billion, over the two-year period. In order to take advantage of this fund, applicants must apply to the IRS for "certification" of the project and its expenses. These applications for certification will be approved on a first come, first served basis; accordingly, prompt action will be essential, as this allocation is likely to be depleted fast.
The law requires the Secretary of the Treasury to begin certification of investments within sixty days of the Act (by May 23, 2010), in consultation with the Health and Human Services. Applications are supposed to be evaluated and qualified expenses certified within thirty days. Details are not yet available as to the specific form or information that an applicant must submit, the nature of any supporting evidence, and so on. Nonetheless, businesses that believe they otherwise qualify under the terms of the Act should immediately begin gathering information on its qualifying investments so that they can quickly apply for certification once details on the logistics of the application process are determined and announced.
What is a qualified investment? Qualified investments are costs incurred in either tax year 2009 or 2010 for expenses necessary for and directly related to the conduct of a qualified Therapeutic Discovery Project. Excluded expenses include certain executive compensation, interest expenses, facility maintenance costs, and certain general administrative costs set forth in IRS regulations. It is likely that the submissions for certification will have to be very detailed and well supported. In a situation where the funds will likely run out early, any delays for clarification of the data may have grave consequences for the successful certification of a project.
What is a qualifying Therapeutic Discovery Project? In terms of subject matter, a qualifying Therapeutic Discovery Project is a project designed to either:
- conduct studies that would ultimately support a new drug application or biologic license application for approval by the U.S. Food and Drug Administration;
- develop molecular-based diagnostics; or
- develop a technology to further the delivery or administration of therapies.
The IRS/HHS:
- will only qualify projects considered to have likelihood of success in producing new therapies in respect to unmet medical needs, chronic or acute diseases, reduce health costs, or advance the eventual cure of cancer, and
- shall take into consideration which projects have the greatest potential to create high paying, high quality jobs and advance U.S. competitiveness.
Therefore, IRS and HHS retain discretion to select projects based on the perceived scientific merit and economic impact. Thus, it is likely that the application for credit/grant will have to include science justification as well as financial data. However, the overall application format is expected to be unlike that of a typical research grant proposal.
Possible Negative Tax Consequences
This tax credit is an opportunity to capture financial support for a broad range of research projects in the life sciences. However, please note that the Act partially balances the credit with certain reduced tax benefits. For example, a credit for expenses on a depreciable item will reduce the basis value of that item. Rules apply to preclude double tax benefits, e.g., a credit as well as bonus depreciation. There are specific rules dealing with coordination of tax credit on certain treasury grants.
§9023 is an emergency measure designed to stimulate the economy, an explanation for the neck-breaking speed to release credit and grants. However, the Act will leave many in the life sciences community disappointed. Life sciences projects in industries that are not directly related to human health will not qualify for funding. The funding of investments over up to two years is probably insufficiently supportive of specific clinical initiatives, such as clinical trials, which have a longer time span. Because of the limited funding, many projects which otherwise qualify will not succeed in winning financing help. The first come, first served approach introduces a certain element of inequity and the likelihood that the selection process will not work particularly well. The credit for years 2009 and 2010 imply that the credit/grant will pay back for past or present investments, not directly stimulate new investment.
Please follow this link to the Patient Protection and Affordable Care Act (P.L. 111-148) and go to page 759: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h3590enr.txt.pdf
