The Patient Protection and Affordable Care Act, signed into law by President Obama on March 23, 2010, establishes a new tax credit that may be of significant benefit to small and mid-sized life sciences companies.
The legislation makes up to $1 billion in tax credits and grants available to small and mid-sized companies for expenditures made during 2009 and 2010 on “qualifying therapeutic discovery projects.”
Importantly, given the fact that many small and mid-sized life science companies are not yet taxpayers, such companies may elect to receive a nontaxable grant in lieu of a tax credit. The credit will therefore reduce the taxes owed by a taxpaying company, but will be paid in cash as a “grant” to a company that is not yet paying taxes because it is not yet profitable.
Because of the $1 billion limit, companies will be required to apply to the U.S. Treasury Department to receive an allocation. The application process and the criteria to be used in allocating the credits and grants are not yet clear.
Any company with 250 or fewer employees at the time of application is eligible for the tax credit or grant. Aggregation rules may apply to groups of affiliated companies where there is more than 50% common ownership. Other aggregation rules may apply for groups of affiliated companies.
Qualifying projects include those designed to:
- Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials or clinical studies to secure Food and Drug Administration approval of a product
- Carry out research protocols to secure Food and Drug Administration approval of a product
- Diagnose diseases or conditions
- Determine molecular factors for diseases
- Develop products, processes or technology to further delivery or administration of therapeutics
Applicants will not receive the tax credit or grant for funds spent on:
- Compensation of executive employees, including the Chief Executive Officer and the company’s four highest compensated officers for the taxable year, other than the Chief Executive Officer
- Interest expenses
- Service costs, including indirect costs that can be identified specifically with a service department or function, such as personnel, accounting, data processing, security and legal departments
- Facility maintenance expenses including mortgage or rent payments, insurance payments, utility and maintenance costs, and costs of employment of maintenance personnel
Allocation Criteria and Application Process
The Treasury Department is directed by statute to consider projects that show reasonable potential to:
- Develop new therapies to treat unmet medical needs
- Prevent, detect or treat chronic or acute diseases and conditions
- Significantly advance the goal of curing cancer within the next 30 years
- Reduce long-term healthcare costs in the United States
and projects that show the greatest potential to:
- Create new high quality, high-paying jobs
- Advance the competitiveness of the United States in life, biological and medical sciences
However, the statute is not specific regarding the criteria to be used to allocate the limited amount of tax credits and grants that will be available. The legislation provides for the Treasury to “certify” projects and taxpayers as eligible in response to an application, but does not specify whether grants and credits will be paid in full on a “first come, first served” basis, allocated pro rata periodically to approved projects, reserved for projects that the Treasury deems the most worthy among those that fulfill the basic criteria or distributed on some other basis.
The statute requires the Treasury to design an application process by May 22, at which point the answers to some of these questions may become clear. It is anticipated, although not certain, that applications will begin to be accepted as soon as 30 days thereafter. We will issue a further Client Alert when the application process is announced.