$1 Billion Available to Life Sciences Companies in Tax Credits and Grants — Application Deadline July 21, 2010

June 22, 2010


Life sciences companies with fewer than 250 employees may apply to the IRS for an income tax credit or a grant of up to $5 million in connection with costs incurred in a “qualifying therapeutic discovery project” during tax years beginning in 2009 and 2010. Subject to approval of an application and to the $5 million per-taxpayer limit, the credit or grant will be equal to 50 percent of the taxpayer’s qualified investment in the project as certified by the IRS. Applications must be postmarked by July 21.


As part of the Patient Protection and Affordable Care Act of 2010, Congress has allocated up to $1 billion for the Qualifying Therapeutic Discovery Project Program (the “Program”). Under the Program, the IRS is authorized to certify the projects and investments therein that will be eligible for income tax credits or grants for tax years beginning during 2009 and 2010. The IRS announced procedures for taxpayer applications and for certification by the IRS in Notice 2010-45, published May 21, 2010.1

The application period for the Program opened on Friday, June 18, when the IRS released Form 8942. To apply, taxpayers must submit (i) a completed and signed IRS Form 8942, along with (ii) a Project Information Memorandum, and (iii) a signed Consent to Public Disclosure of Certain Qualifying Therapeutic Discovery Project Program Application Information.2 Applications must be postmarked by July 21, and no preference is given to applications submitted early.3

Taxpayer and Investment Eligibility

To be eligible for an award, a taxpayer (together with included affiliates) must have 250 or fewer employees (including both full- and part-time employees but excluding leased employees).4 In addition, taxpayers must be engaged in a qualifying project, which may include drug development; molecular diagnostics; or development of therapeutic products, processes or technologies. The IRS will share applications with the Department of Health and Human Services (HHS), which will make the initial determination of whether a project is a qualifying project.

The taxpayer’s choice of entity will not affect its eligibility for an award, as C corporations, S corporations, LLCs, partnerships and individuals who file Schedule C are all eligible to apply.5  

Qualified investments are limited to costs “necessary and directly related” to a qualifying therapeutic discovery project, exclusive of: (i) compensation for the CEO or the other four highest-paid officers of the taxpayer; (ii) interest expense; (iii) facility maintenance expenses; and (iv) internal service costs such as G&A, legal and accounting expenses.6 An investment in property eligible for bonus depreciation is excluded from qualified investments, and the IRS may exclude other costs at its discretion. In addition, a taxpayer’s qualifying investments will be reduced dollar-for-dollar by the taxpayer’s tax-exempt grants covering the same project, unless such grants can only be spent to cover costs which are not qualified investments.7  

Evaluation of Applications

Program applications will be evaluated by both the Department of Health and Human Services (HHS) and the IRS. First, HHS will evaluate each application to determine (i) whether the taxpayer’s project is a qualifying therapeutic discovery project, and (ii) whether the taxpayer’s project shows “reasonable potential” to meet one of the following goals:

(a) to result in a new therapy which either addresses areas of unmet medical need or prevents, detects or treats chronic or acute diseases and conditions; or
(b) to reduce long-term healthcare costs; or
(c) to significantly advance the goal of curing cancer in the next 30 years.8

HHS will make its determinations based upon information provided by the applicant in the Project Information Memorandum.9  

If an application receives a favorable HHS review, the IRS will determine the portion of the taxpayer’s investment to certify as qualified investment based upon the project’s “potential to create and sustain high quality, high-paying jobs in the United States and to advance United States competitiveness in the fields of life, biological, and medical sciences.”10 The IRS will make its determinations based upon information provided by applicants on Form 8942, with an emphasis on whether a given project (i) will produce a new or significantly improved technology or a new application or a significant improvement to existing technology, and (ii) is expected to lead to the construction or use of a contract production facility in the U.S. in the next five years.

Applications will be reviewed by HHS and the IRS by September 30 and, if they meet all of the requirements, qualified investments will be certified by the IRS in amounts up to $10 million per taxpayer.11 Taxpayers will receive an income tax credit (subject to generally applicable limitations on investment credits) or a grant equal to 50 percent of their certified qualified investment. The IRS may certify all, or only a portion, of each qualified investment. Taxpayers will receive decision letters by October 29.12


Applicants must file separate applications for each project for which a credit or grant is sought.13

Grants may not be awarded to federal, state or local governmental bodies; cooperative electric companies; clean renewable energy lenders; notprofits; or pass-through entities owned by any of the above.14 Grant applications for qualifying investments made during a tax year beginning in 2010 will not be effective, and will not be paid, until the taxpayer’s 2010 tax year has ended.15 Expenses certified as qualifying investments will not be deductible in computing taxable income. If a qualifying investment includes purchases of depreciable property, the tax basis of the property must be reduced by the amount of the credit received, i.e., by 50 percent. Additional limitations may also apply.16

Further Information

The IRS sets out rules for the Program in IRS Notice 2010-45, and has posted Form 8942 along with a Q&A about the Program on its website.

For more information regarding the subject matter of this alert, please contact:

Jack Concannon, Co-chair, Life Sciences Industry Group, 617.951.8874

Brian Beglin, Co-chair, Life Sciences Industry Group, 212.705.7204

12010-23 I.R.B. 734.
2Notice 2010-45, § 6 & Appendix A.
3Tax Credit or Grant for Qualifying Therapeutic Discovery Projects: Questions and Answers,,,id=224011,00.html.
4IRS Notice 2010-45 § 4.03.
5Tax Credit or Grant for Qualifying Therapeutic Discovery Projects: Questions and Answers,,,id=224011,00.html.
6Notice 2010-45, § 4.01.
7Id.; 26 U.S.C.A. § 48D(e)(2)(A) (2010).
8Notice 2010-45. § 5.
9Id. at Appendix A.
10Id. at § 5.; Appendix A.
11Id. at § 5.02(2).
12Id. at § 5.02(7-8).
13Id. At § 5.02(1).
14Tax Credit or Grant for Qualifying Therapeutic Discovery Projects: Questions and Answers,,,id=224011,00.html.
15IRS Notice 2010-45 §§ 8.01(3), 8.02(2).
16See Affordable Care Act, §§ 9023(a), 9023(e)(9).

This article was originally published by Bingham McCutchen LLP.