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
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.
Therapeutic Discovery Project Tax Credits
and Grants
A provision in the recently adopted health care reform legislation, the 2010 Health
Care Act as amended by the 2010 Health Care Reconciliation Act, amends the
Internal Revenue Code (the “Code”) to include a new §48D. The provision
establishes a 50 percent investment tax credit for qualified investments in qualifying
therapeutic discovery projects. In lieu of the tax credit, a company may elect to
receive a tax-free cash grant. To be best-positioned to receive the tax credits or
grants, companies should be prepared to file applications shortly after the rules are
announced on or before May 21, 2010.
The provision allocates $1 billion during the two-year period 2009 through 2010 for
the program. The Secretary of the Treasury (the “Secretary”), in consultation with
the Secretary of Health and Human Services, will award certifications for qualified
investments.
Not later than May 21, 2010, the Secretary must publish rules for the establishment
of a qualifying therapeutic discovery project program to consider and award
certifications for qualified investments eligible for the credits or grants. It is
expected that these rules will be published in a notice issued by the Internal Revenue
Service.
Eligibility for Tax Credits
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.
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 pre-clinical 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 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;
Life Sciences Alert
(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.
Companies must apply to the Secretary to obtain
certification for qualifying investments. The
Secretary, in determining qualifying projects, will
consider only those projects that show reasonable
potential to: (1) result in new therapies to treat areas
of unmet medical need or to prevent, detect, or treat
chronic or acute disease and conditions; (2) reduce
long-term health care costs in the United States; or
(3) significantly advance the goal of curing cancer
within a 30-year period. Additionally, the Secretary
will take into consideration 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. The Secretary must take action to
approve or deny an application within 30 days of the
submission of such application.
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.
extent of the credit claimed that is attributable to
such expenditures.
Election to Receive Grant in Lieu of
Tax Credit
Taxpayers may elect to receive credits that have
been allocated to them in the form of Treasury
cash grants equal to 50 percent of the qualifying
investment. Any such grant is not includible in
the taxpayer's gross income.
In making grants, the Secretary 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 Secretary
must provide for the recapture of an appropriate
percentage of the grant amount in such manner as
the Secretary determines appropriate.
The Secretary may not make any grant to: (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
pass-through entity any partner (or other holder of
an equity or profits interest) of which is described in
clause (1), (2) or (3).
Effective Date
The provision applies to expenditures paid or
incurred after December 31, 2008, in taxable years
beginning after December 31, 2008.
Additionally, expenditures taken into account in
determining the credit are nondeductible to the
The credits and grants will be awarded until such time as the $1 billion allocated therefore has been
fully utilized. Since the Secretary must act on applications within 30 days after they have been
submitted, it is expected that there will be a rush to file applications shortly after the applicable rules
are announced on or before May 21, 2010. Companies should be prepared to act quickly once the
applicable rules are announced by the Secretary.
May 2010
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Life Sciences Alert
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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
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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.
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May 2010
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