The Therapeutic Discovery Project Credit (TDPC) was established under Section 48D of the Internal Revenue Code as a result of Section 9023(a) of the Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act). This credit may provide significant value to small and midsize (up to 250 employees) biotechnology and life sciences companies.

Under this newly enacted legislation, companies may receive—as either a tax credit or grant—50 percent of the amount of qualified investments made in taxable years beginning in 2009 and 2010. Because a grant can be received in lieu of a credit, companies that would not benefit from a credit can still receive a cash benefit from this program.

Qualifying Expenses & Projects

The TDPC defines a qualifying therapeutic discovery project as a project that meets at least one of the following conditions:

• Treats or prevents diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies or carrying out research protocols aimed at securing FDA approval of a product
• Diagnoses diseases or conditions
• Determines molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions
• Develops a product, process or technology to further the delivery or administration of therapeutics

Eligible expenses include research costs as well as capital equipment used in a qualified project. Certain types of costs not eligible for the credit include compensation paid to certain highly compensated employees, interest expense, facility maintenance expenses, e.g., mortgage or rent payments, insurance payments, utility and maintenance costs and costs of employing maintenance personnel, certain indirect costs (including personnel), data processing and accounting costs and any other expenses determined by the Treasury to be appropriate for exclusion.

Application

A maximum in $1 billion in credits and grants will be awarded to companies for qualifying projects. The program will expire once the budget has been reached. Applications will be reviewed by the IRS and Department of Health and Human Services (HHS) to determine the allocation of benefits among competing companies. Code Section 48D directs the IRS and HHS to take into account several factors when making determinations. Companies will need to demonstrate a project has a reasonable potential to meet at least one of the following conditions:

• Results in new therapies to treat areas of unmet medical need or to prevent, detect or treat chronic or acute diseases or conditions

• Reduces long-term health care costs in the United States
• Significantly advances the goal of curing cancer within the 30-year period beginning in May 2010

The IRS also is directed to take into consideration which projects have “the greatest potential (i) to create and sustain (directly or indirectly) high-quality, high-paying jobs in the United States, and (ii) to advance United States competitiveness in the fields of life, biological, and medical sciences.”

Issued May 21, 2010, Notice 2010-45 provides background regarding the TDPC and timeline for submitting an application. The application was released June 21, 2010, and the final date for submitting completed applications and project information memorandums is July 21, 2010. There is a brief window of opportunity for companies to reap the benefit of the TDPC. Notice 2010-45 provides companies with the information they need to get a head start on compiling information to ensure timely filing of the application.

Clients who may qualify for the TDPC program should begin documenting their qualified projects and expenses immediately. To determine if you may qualify, contact your BKD advisor.