The qualified therapeutic discovery project tax credit and grant.

• Author: Bakale, Anthony S.

Included in the 2010 Patient Protection and Affordable Care Act, P.L. 111-148 (Patient Protection Act), are a few new income tax credits. In particular, there is one that many new startups and growing health care industry enterprises may benefit from--the qualifying therapeutic discovery project credit (Sec. 48D).

Prior to the passage of the Patient Protection Act, the only tax credits available for drug development or medical devices fell under cither the research credit of Sec. 41 or the orphan drug credit of Sec. 45C. Congress has now increased the tax credits available to the health care industry through the addition of the qualifying therapeutic discovery project credit under Sec. 48D and the investment tax credit provisions of Sec. 46. This is designed to encourage investment in new therapies for diseases.

As of this writing, the new credit is still a work in progress. Congress appointed the IRS and the secretary of Health and Human Services to roll out a "certification procedure" for taxpayers that may qualify. The IRS established the certification procedures on May 21 (Notice 2010-45).

The credit is equal to 50% of the qualified investment for any qualified therapeutic discovery project of an eligible taxpayer. However, the IRS has announced that it will not certify more than $10 million as a qualified investment for any single taxpayer, meaning each taxpayer will be allocated no more than $5 million in credits or grants.

The following are the general criteria to qualify for the new credit provision under Sec. 48D.

Qualified Investment: Sec. 48D(b)

A qualified investment is the sum of the total costs paid or incurred in tax years beginning in 2009 and 2010 necessary for and directly related to the conduct of a qualifying therapeutic discovery project. There are specific costs that are not included in the qualified investment calculation. Excluded expenses include:

* Remuneration for the CEO of the taxpayer or any individual working in such a capacity;

* Interest expense;

* Facility maintenance expenses such as rent or mortgage payments, insurance, utility and maintenance costs, or wages for maintenance personnel;

* Service costs as defined by Regs. Sec. 1.263A-1(e)(4); and

*Any other cost the IRS determines as appropriate to carry out the purpose of the Sec. 48D tax credit.

The amount treated as a qualified investment with respect to any qualifying therapeutic discovery project cannot exceed the amount certified by the IRS as...