September 1, 2010 (Vol. 30, No. 15)

QTDP Targets Programs Focused on Unmet Medical Needs and a Host of Chronic Diseases

When President Obama signed the Patient Protection and Affordable Care Act on March 23, a new Internal Revenue Code Section, 48D, was created that provided for a tax credit or grant for qualified investments. The credit or grant is aimed at small and medium companies (250 or fewer employees) in the life science and pharmaceutical industries.

The program allows qualifying companies to claim a tax credit or receive a grant for a Qualifying Therapeutic Discovery Project (QTDP) during tax years 2009 and 2010, with a maximum of $1 billion allocated under the program.

When the program was announced in March, the benefit was said to equal 50% of allowable expenses of the QTDP. Importantly, unlike similar programs for other industries in the past, this one allows companies to elect a grant in lieu of a tax credit, regardless of the company’s taxable status. The due date for applications was July 21; and companies should not expect notification of awards until late October.

To qualify for the program, companies had to apply on a project-by-project basis and wait to be certified by the Treasury Department. The Treasury Department will only take into consideration projects that show a reasonable potential to:

  • Result in new therapies to treat areas of unmet medical need or to prevent, detect, or treat chronic or acute diseases and conditions, or
  • Reduce long-term healthcare costs in the U.S., or 
  • Significantly advance the goal of curing cancer within 30 years.

In addition, the Treasury Department will also consider which projects have the greatest potential to:

  • Create and sustain, directly or indirectly, high quality, high-paying jobs in the U.S.; and 
  • Advance U.S. competitiveness in the fields of life, biological, and medical sciences.

Although the basic selection criteria were announced in March 2010, details and guidance did not come until later. The Internal Revenue Service (IRS) released guidance approximately once a month, in April, May, and June. Many companies were frustrated by the process because expectations changed as information was released. The three biggest areas of frustration related to timing of availability of the application form, timing and selection method, and potential size of the benefit.

Although the original language of Section 48D said the application form would be available by April 21, 2010, and Treasury would act on applications within 30 days of submission, in reality, the application form was not made available until June 18, 2010.

In addition, companies did not know for weeks that there would be strict word limits on most of their technical answers, leading them to have to change much of the work they had done.

Most importantly, however, was the change in benefit expectation. Although the program initially talked about a 50% benefit, later guidance clarified that the actual benefit would be up to 50% with an aggregate $5 million maximum benefit for each company.

To determine the amount of benefit for each company, Treasury will determine an “equal” amount to distribute to each approved application based on the number of approvals. This means that an application with $10 million in eligible costs could be awarded the same amount as a project with $1 million in eligible costs. Many companies were disappointed by this change as the impact on their businesses will not be as significant as they thought.

Even with the changes, however, the program is generous and accessible compared to others. As a result, it has been extremely popular with eligible companies. Many of the companies participating in the program have also taken advantage of Small Business Innovation Research (SBIR) and Small Business Technology Transfer  programs.

In many ways the programs complement each other. The main reason for this is that, unlike other tax-based R&D incentive programs, this one does not make research costs funded by other programs ineligible. This means that a company that received a SBIR grant could apply the costs funded by the grant to this program as well.

Many companies were expecting guidance that would eliminate this possibility but were pleasantly surprised when it did not come. Another reason for the complementary nature of the programs is that many companies had prepared grant requests in the past related to the same projects and could thus reuse their research and responses.

In terms of this specific program, companies reported that the application time-line—June 18 when the application form was released to July 21 when applications were due—led to a more efficient preparation process as they did not have any time to waste.

Anticipating the number of applications and the resources available to Treasury to assess them, many companies also believe that the assessment process will not be as arduous as with other grant programs. Finally, although the benefit will not be a full 50% for most applicants, the amount they expect is still generous, and since the vast majority of applicants are not current taxpayers, as they are in the development stage, they will still benefit since they will receive a grant instead of a tax credit.

Application Statistics

In terms of applications, based on our experience, the average applicant submitted between two and three applications. Within those applications, they claimed about $21 million, with an average claim of about $9 million per application. Based on the initial wording of the program, this would have resulted in about $11.25 million in aggregate benefit for each applicant, however, based on the guidance released later we know that the maximum will be $5 million, and most applicants are expecting significantly less.

The average number of employees per company was 20. In general, we found that applicants had very few employees (under 15), or were close to the 250 limit. Based on these numbers, it appears as though the program reached its intended target—small, innovative life science and pharma firms.

Applicants are now waiting for word from Treasury about whether they were approved or not. When approvals are publicized we will know the details about the number of applicants as well as who was approved. Between now and then, however, there is much speculation about the future of the program.

The general consensus is that the program should be renewed; there was an overwhelming amount of interest in the program, and those who qualify are genuinely excited about it. For companies with fewer than 15 employees in early-stage development, this type of funding can mean the difference between successfully completing a project and terminating it.

That’s not to say, however, that the program was perfect. As with most programs, there is room to grow and improve. The most common suggested area for improvement is in the method of allocating the funding. Companies have suggested that a pro-rated approach would be more fair than the equal amount determined by Treasury under the current guidelines.

Overall, the program has been successful and well received. Companies partaking in QTDPs are looking forward to hearing from Treasury about whether or not they have been approved.

Chris Bard ([email protected]) is national leader of R&D tax services, and Jonathan Forman ([email protected]) is principal of R&D tax services at BDO. Web:

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