Tax and Life Sciences Alert
May 2010
Authors:
John S. Russell
john.russell@klgates.com
919.466.1117
Robert B. Womble
robert.womble@klgates.com
919.743.7309
Charles H. Purcell
charles.purcell@klgates.com
206.370.8369
Darcie L. Christopher
darcie.christopher@klgates.com
202.370.8173
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Guidance Issued on Application Procedure
for Qualifying Therapeutic Discovery Project
Tax Credits and Grants
In March, 2010, President Obama signed into law the 2010 Health Care Act as
amended by the 2010 Health Care Reconciliation Act (the “Health Care Act”). The
Health Care Act amended the Internal Revenue Code (the “Code”) to add a new
§48D. Section 48D establishes a 50 percent investment tax credit for qualified
investments in qualifying therapeutic discovery projects (the “Qualifying
Therapeutic Discovery Project Credit”). In lieu of the tax credit, a company may
elect to receive a tax-free cash grant. Only amounts certified by the Internal
Revenue Service (“IRS”) in consultation with the Department of Health and Human
Services (“HHS”) qualify for the credit or grant under §48D.
On May 21, 2010, the IRS issued detailed guidance establishing the qualifying
therapeutic discovery project program (the “Program”), describing application
criteria, and setting application deadlines for the primary 2009-2010 allocation round
(the “Guidance”). Only $1 Billion is allocated to the Program for the two-year
period between 2009 through 2010. It is expected that the full $1 Billion will be
allocated among companies during the primary allocation round. Thus, companies
interested in applying for certification under the Program should be careful to ensure
that complete applications are submitted by the deadline of July 21, 2010, as set forth
in the Guidance and described below.
Application Procedures and Deadlines
A company must file a separate application for each qualifying therapeutic discovery
project for which the company is seeking certification as a qualified investment. The
application must be complete and be postmarked or delivered no later than July
21, 2010. A complete application will include a Form 8942, completed in
accordance with instructions, an attached Project Information Memorandum, and in
some cases, a Consent to Public Disclosure. It is expected that the Form 8942
application will be available on the IRS website (www.irs.gov) no later than June 21,
2010. However, Appendix A of the Guidance provides the information that will be
required in Form 8942 and a description of the information required in the Project
Information Memorandum. Thus, companies planning to participate in the Program
should immediately begin preparing information for inclusion in the application.
Each application submitted will be subject to preliminary review by the IRS, which
will enable the IRS to determine whether the applicant is an eligible taxpayer
(described below) and whether the application is otherwise complete. The
preliminary review period will end on September 30, 2010. Companies whose
projects are certified under the Program will be notified by the IRS by October 29,
2010.
Tax and Life Sciences Alert
Eligibility for tax credits
Eligible Companies
The credit is available only to companies having 250
or fewer employees. The number of employees is
determined taking into account all businesses of the
taxpayer at the time it submits an application. For
this purpose, the term “employee” includes both
full-time and part-time employees, but does not
include leased employees.
Eligible Projects
A “qualifying therapeutic discovery project” is a
project which is designed to develop a product,
process, or therapy to diagnose, treat, or prevent
diseases and afflictions by: (1) conducting preclinical activities, clinical trials, clinical studies, and
research protocols; or (2) developing technology or
products designed to diagnose diseases and
conditions, including molecular and companion
drugs and diagnostics, or to further the delivery or
administration of therapeutics. The Guidance
provides additional information regarding qualifying
projects. For example, the Guidance notes that
projects for the development of generic drugs,
dietary supplements, and most cosmetics will not be
qualified projects under the Program.
The qualified investment for any taxable year is the
aggregate amount of the costs paid or incurred in
such year for expenses necessary for and directly
related to the conduct of a qualifying therapeutic
discovery project. The qualified investment for any
taxable year with respect to any qualifying
therapeutic discovery project does not include any
cost for: (1) remuneration for the chief executive
officer, or one of the four highest compensated
employees other than the chief executive officer if
such employee’s compensation is required to be
reported to the shareholders under the Securities
Exchange Act of 1934; (2) interest expense; (3)
facility maintenance expenses; (4) certain general
and administrative costs that can be identified
specifically with, or directly benefit or are incurred
by reason of, a “service department or function”
including personnel, accounting, data processing,
security, legal, and other similar departments; or (5)
any other expenditure as determined by the
Secretary as appropriate to carry out the purposes of
the provision.
Selection Criteria
Companies must apply to the IRS to obtain
certification for qualifying investments. The
application must include a Project Information
Memorandum of up to 250 words, providing an
overview of the project.
Only those projects that show a reasonable potential
to meet at least one of three statutorily defined goals
will qualify. The statutorily defined goals are as
follows:

The project must 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 disease and conditions.
o
A “new therapy” is one that is novel and
easily distinguishable from therapies
currently on the market. For example,
according to the Guidance, the therapy
should not be in the same class as existing
therapies, unless the therapy is expected to
offer a significant enhancement in safety or
effectiveness.
o
“Unmet medical needs” include, for
example, novel influenza vaccine
technologies, broad spectrum anti-viral
medications, novel antibiotics, and platform
vaccine technologies.
o
In addition to new therapies that treat
diseases and conditions, new therapies that
detect or prevent diseases and conditions,
will also satisfy this goal.
- OR -

The project must show a reasonable potential to
reduce long-term health care costs in the United
States. A company intending to meet this goal
must describe in its application how the
company’s project is likely to reduce health
care costs, including a description of how the
project will lead to actual cost reductions, not
just substituting one cost for another.
- OR -

The project must show a reasonable potential to
significantly advance the goal of curing cancer
within a 30-year period.
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Tax and Life Sciences Alert
Additionally, before certifying an application, the
IRS will consider which projects would have the
greatest potential to: (1) create and sustain (directly
or indirectly) high-quality, high-paying jobs in the
United States; and (2) advance U.S. competitiveness
in the fields of life, biological, and medical sciences.
For this purpose, both actual employees of the
applicant and leased employees may be included. In
addition, the IRS will consider the number of
contractors in the United States paid for work on the
project and the average monthly compensation and
average monthly hours of the contractors in
determining if a project will create and sustain highquality, high-paying jobs in the United States. In
determining if the project will advance U.S.
competitiveness, the IRS will also look to whether
the project will produce a new or significantly
improved technology or application and is likely to
lead to construction or use of a contract production
facility in the United States in the next five years.
Limitations
Qualified therapeutic discovery project expenditures
do not qualify for the research credit, orphan drug
credit, or bonus depreciation. If a credit is allowed
for an expenditure related to property subject to
depreciation, the basis of the property is reduced by
the amount of the credit. Additionally, expenditures
taken into account in determining the credit are
nondeductible to the extent of the credit claimed that
is attributable to such expenditures.
Election to receive grant in lieu of tax credit
A company may elect to receive credits that have
been allocated to it in the form of cash grants
equal to 50 percent of the qualifying investment.
Any such grant is not includible in the company’s
gross income.
Companies must affirmatively elect on Form 8942 to
apply for a grant for 2009 or 2010. If the company
is submitting an application for certification of a
qualified investment made in both 2009 and 2010,
then the company may apply for a grant for 2009
only, 2010 only, or both 2009 and 2010. Companies
may also submit an amended Form 8942 electing the
grant in lieu of the credit, provided the company
meets certain deadlines described in the Guidance.
In making grants, the IRS is to apply rules similar to
the rules applicable to investment tax credits. In
applying such rules, if an investment ceases to be a
qualified investment, the IRS must provide for the
recapture of an appropriate percentage of the grant
amount in such manner as the IRS determines
appropriate.
Certain taxpayers do not qualify for the grant,
including: (1) any Federal, State, or local
government (or any political subdivision, agency, or
instrumentality thereof); (2) any organization
described in Code §501(c) and exempt from tax
under Code §501(a); (3) any clean, renewable
energy bond lender or cooperative electric
company; or (4) any partnership or other passthrough entity any partner (or other holder of an
equity or profits interest) of which is described in
clause (1), (2) or (3).
Amount of Credits/Grants
The aggregate amount of qualified investments that
will be certified by the IRS will not exceed $2
Billion. The total amount of credits and grants
allocated under the Program will not exceed $1
Billion (i.e., 50 percent of $2 Billion). The IRS will
not certify more than $10 Million as a qualified
investment for any single taxpayer, such that no
taxpayer may be allocated more than $5 Million in
credits or grants in the aggregate for 2009 and 2010,
regardless of the number of projects the taxpayer
sponsors. Thus, assuming the full $2 Billion is
certified, qualifying projects of at least 200
taxpayers should be eligible for certification under
the Program.
Public Disclosure
The IRS will disclose certain information pertaining
to qualifying projects, including the identity of the
applicant and the amount of the credit or grant with
respect to the applicant, and in the case of
certifications for grants the type and location of the
project. The IRS will seek permission to disclose
the type and location of projects certified for credits.
Since the applications are not tax returns, they are
not covered by statutory exceptions from Freedom
of Information Act (“FOIA”) disclosure pertaining
to returns and return information. Thus, applicants
should consider including in the Project Information
Memorandum appropriate claims of exemption
from FOIA disclosure pertaining to trade secrets,
confidential, privileged and otherwise exempt
information.
May 2010
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Tax and Life Sciences Alert
The credits and grants will be awarded until such
time as the $1 Billion allocated therefore has been
fully utilized. It is expected that the $1 Billion
will be fully utilized in the primary 2009-2010
application round. Thus, interested companies
should be prepared to submit applications by the
deadline of JULY 21, 2010.
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Washington, D.C.
K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named
K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an
office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L
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Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each
entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
May 2010
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