Lucrative New Biotech Tax Credit — Is Your Firm Eligible?
A tax credit for research expenses could prove to be a huge financial opportunity for many small to mid-sized biotech firms, thanks to a provision in the health reform act recently signed into law by President Obama. The funds are limited, however, and will likely go fast. Are your company’s research investments eligible? Here we outline what you need to know about this new biotech tax credit.
What Is the Biotech Tax Credit?
Consumer spending isn’t the only thing hurting because of the tough economy. Investment in biotech research has also experienced a significant downturn, negatively impacting jobs and threatening advances in medical research. To help stimulate investments in innovative biotech research, Senator Robert Menendez from New Jersey proposed an amendment to the health reform legislation — the Investment Credit for Qualifying Therapeutic Discovery Projects. This provision gives a tax credit equal to 50% of eligible biotech investments for therapeutic discovery projects — or a tax-free grant for the same amount — during tax years 2009 and 2010. That means qualifying biotech firms with a tax liability can get their tax bills cut in half, while companies with no tax liability can receive a nontaxable lump sum from the government.
What Is the Qualifying Criteria for the Biotech Tax Credit?
The new tax credit is certainly great news for the biotech industry. There are several qualifying criteria, however, that limit the types of companies and research projects eligible for the credit. Only biotech companies with 250 employees or less, for example, will qualify for the tax credit. In addition, the 50% credit or grant will be applicable only to “qualified investments” for “qualifying discovery projects.”
Investments That Qualify for the Credit
Investments that qualify for the biotech tax credit will include therapeutic development activities, such as expenditures for conducting clinical studies and scientists’ salaries. The credit, however, likely won’t cover facility maintenance, interest expenses, certain high pay scale employees’ salaries, or administrative expenses.
Research Projects That Qualify for the Credit
According to the provision, a research project must fulfill one of the following design criteria to be eligible for the biotech tax credit:
- It treats or prevents diseases or conditions through pre-clinical research and clinical trials and studies with the purpose of getting FDA approval.
- It diagnoses diseases, or finds molecular factors related to diseases, that can be used to help make therapeutic decisions.
- It develops a methodology to help advance the delivery or administration of therapeutics.
$1 Billion Cap — First Come, First Served
Unlike most tax credits, the money available for this new biotech credit is limited, and companies will have to apply and compete for the funding. Biotech tax credit funds will be capped at $1 billion for 2009 and 2010 and distributed on a first-come, first-served basis.
What Could Put Your Application in Better Standing?
To apply for the biotech tax credit, small to mid-sized biotech firms must submit their projects to the U.S. Department of the Treasury and show how their research lowers health costs or meets a medical need. Once biotech companies have accurately documented their research projects and costs, the Department of Treasury — consulting with the Department of Health and Human Services — will review applications for a project’s overall medical benefit, as well as its impact on U.S. jobs and the economy. Here’s what you need to know about them:
- Medical Benefit
To compete for the biotech tax credit, favorable medical benefit factors include:
- new therapies that treat areas of unmet need
- new therapies that prevent, detect, or treat chronic or acute diseases and conditions
- a reduction of long-term healthcare costs
- a significant advancement that may lead to a cure for cancer within 30 years.
- Jobs and the Economy
Special consideration will be given to research projects with the potential to advance U.S. competitiveness in the fields of life, medical, and biological sciences. In addition, projects will be critiqued based on their potential to create and sustain high-paying jobs in the United States.
The Time to Act Is Now
This new research tax credit that is part of the health reform package will be a welcome boon to many small and mid-sized biotech companies and their investors. Regulations that detail the expenditures covered and application procedures are expected to be issued by the Department of the Treasury about the time of this newsletter publication. Because funds are limited, the money will go quickly. So now is the time to prepare for the application process by determining which of your company’s research projects and expenditures may qualify for reimbursement. The application period opens June 21 and runs through July 21, 2010.
For more information:
Investment Credit for Qualifying Therapeutic Discovery Projects
Joint Committee on Taxation’s Technical Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,” as amended in combination with the “Patient Protection and Affordable Care Act” |
