Lucrative New Opportunity For Small to Mid-Sized Biotechnology Companies

Overview of the Qualifying Therapeutic Discovery Project Credit

The Qualifying Therapeutic Discovery Project Credit ("the Credit") was created by Congress as part of the Patient Protection and Affordable Care Act passed on March 23, 2010. The potential incentive for small to mid-sized biotechnology companies is significant but there are limited funds available and there is a short two year window to take advantage of the incentive on a first come, first serve basis.

Biotechnology

Consequently, the time to act is now or you will miss out on this opportunity.

Lucrative New Opportunity For Small to Mid-Sized Biotechnology Companies

This article will outline the positive and negative aspects of The Credit and why you must begin the process immediately to obtain your piece of the pie.

Net Benefit Examples

Before delving into the details of the Credit, let's look at two examples of the potential benefit for eligible companies. An important aspect of the Credit is that companies cannot take the same expenses toward the Credit and the R&D Credit. (The R&D Credit may be utilized for other expenses). These examples illustrate both the size of the incentive for the Credit but also how it compares to the R&D Tax Credit.

Benefit Comparison Example: Medical Device Maker

Sampling of Activities:

Drug Delivery Devices

Treatment Delivery Systems

Therapeutic Care Equipment

Medical Monitoring Devices

Qualified Expenditures:

2009 - Million

2010 - Million

Benefit Comparison:

Estimated net benefit under the R&D Tax Credit: 5,000

Estimated net benefit under The Credit: ,625,000

Benefit Comparison Example: Biopharmaceutical Development

Sampling of Activities:

Pharmaceutical Research

Clinical Trials

Pre-Clinical Research and Testing

Qualified Expenditures:

2009: Million

2010: .5 Million

Benefit Comparison:

Estimated net benefit under the R&D Tax Credit: 2,500

Estimated net benefit under the Affordable Care Credit: 2,500

Overview of The Credit

Biotechnology firms have a lucrative opportunity to recover newly created Federal grants and tax credits. Under the Patient Protection and Affordable Care Act, eligible firms can apply for a tax credit or non-taxable cash grant in an amount equal to 50% of investments made in qualified therapeutic discovery projects. Congress mandated the creation of a new program, administered by the Secretary of the Treasury ("the Secretary"), to consider grants and credits by the end of May 2010. While the scope of activities covered by the Qualifying Therapeutic Discovery Project Credit ("the Credit") is broad, the amount of funds and years of eligibility are limited.

Broad in Scope

The Credit goes beyond existing investment tax incentives. Under the new law, expenses incurred in pursuit of any project designed to develop a "product, process, or technology" that furthers the "delivery or administration of therapeutics" are qualified. Moreover, projects designed to treat or diagnose a disease or condition may be qualified.

Consideration will be given to those projects that show reasonable potential to result in:

1) new therapies that treat areas of unmet medical need;

2) new therapies that prevent, detect, or treat chronic or acute diseases and conditions;

3) reduction of long-term health care costs in the United States; and

4) significant advancement of the goal of curing cancer within a 30-year period.

Like other investment tax credits, national job creation and retention is an important part of the law. When considering grants and credits, the Secretary will take into account the potential to create and sustain high paying U.S. jobs, as well as the potential benefit to U.S. competitiveness in the fields of life, biological, and medical sciences.

Eligible Companies

Firms that employ medical researchers, biomedical engineers, and other personnel with a background in life sciences should consider this opportunity.

Here is a list of companies that may have eligible projects for The Credit:

• Pharmaceuticals

• Medical, Drug Delivery and Health Device Manufacturers

• Biopharmaceutical Engineering Firms

• Genetic Research Firms

• Biomedical Engineering Firms

• Life Sciences Companies

• Health Sciences Companies

• Health Diagnostics Manufacturers

• Biomedical Manufacturing

• Therapeutic Treatment Companies

• Biomaterial Firms

• Tissue Engineering Companies

• Biomedical Optics Firms

• Cancer Research Companies

• Cancer Treatment Firms

• Radiology Companies

• Nanotechnology Firms

Major Benefits of The Credit

Unlike other investment tax incentives:

1. Applicants for the Credit are not required to have current taxable income.

2. Firms with no tax liability can apply for a grant in lieu of a tax credit.

3. The Credit has a statutory response time of 30 days.

a. Firms applying for the tax credit will be approved or denied by the Treasury Department within 30 days from the date of application.

b. Firms applying for a grant must be paid within 30 days from the later of the date of application or the date the qualified investment is made.

Limitations

Firms considering a grant or credit must take action now because of the following limitations:

1. Under current law, The Credit is only applicable to qualified investments made during the 2009 and 2010 tax years.

2. The amount of funds currently available is capped at billion.

3. The credit is limited to firms with 250 employees or less.

These limitations will result in intense competition for the funds currently allocated.

Program Administration

Under the new law, the Secretary must establish a program to administer the Credit not later than 60 days from the date of enactment. Though the Secretary has not released new details yet, it is clear that application and approval of funds will occur relatively quickly. Though the exact details of the program have not been released, eligible firms must begin tax planning.

Summary

In our estimation, the positive aspects of the Qualifying Therapeutic Discovery Project Credit are enormous but there is a small window of opportunity to take advantage of The Credit.

Given the administration and scrutiny of existing tax incentives, such as the R&D tax credit, those tax consultants with a background in science and engineering are particularly well suited to capture this new opportunity. Tax consultants with these qualifications are in the best position to help taxpayers properly identify qualified therapeutic investment projects. Eligible firms should contact a qualified tax advisor immediately.

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The authors are Karim Solanji, J.D., Director and Mark Lauber, VP of Marketing both of Paradigm Partners. Paradigm Partners is a national tax consulting firm specializing in niche tax services such as the R&D Tax Credit, Qualifying Therapeutic Discovery Project Credit, the IC-DISC (U.S. Exporters' Tax Incentive), WOTC (Federal and State Hiring Tax Incentives), Section 179 and Cost Segregation. Mark's email is MLauber@ParadigmLP.com and his phone number is (281) 558-7100 X-105. Our website is http://www.ParadigmLP.com.