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Tax Law

IRS Issues Notice 2010-45 with Application Criteria for New Section 48D

On May 21, the Treasury Department released Notice 2010-45 (Notice) for guidance on the Qualifying Therapeutic Discovery Projects credits program under Section 48D. As we described in our April 6 Client Alert, to qualify for the credit, taxpayers must receive a certification from the IRS that they have a Qualifying Therapeutic Discovery Project (QTDP) before they claim the credit on a federal income return or receive a grant in lieu of the credit.

Background on Section 48D

The Health Care and Education Reconciliation Act established the investment tax credit for certain expenditures related to a QTDP made in 2009 or 2010 under newly created Section 48D for eligible taxpayers with less than 250 employees.1 The federal credit is equal to 50 percent of the aggregate costs paid or incurred in a taxable year that are directly related to a QTDP. Importantly, the new provision also permits the Treasury to provide taxpayers with a grant in lieu of the tax credit, so that even companies that are unable to use the tax credit to offset future taxable income may receive the cash grant.

A QTDP is a project designed to develop a product, process or therapy to diagnose, treat, or prevent diseases and afflictions by: (1) conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or (2) by developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or to further the delivery or administration of therapeutics.

Notice 2010-45

The Notice and its appendices provide applicants with the information required to be submitted for taxpayers seeking an HHS recommendation, as well as information to be supplied to the IRS for certification. The Notice also provides a series of helpful definitions and rules for eligible applicants. Key rules to note include:

  • each taxpayer will be eligible to certify a maximum of $10 million in eligible costs which results in a maximum credit/grant of $5 million
  • partial awards may be given
  • a taxpayer must submit a separate application for each QTDP
  • the cost of leased employees may be allocated were appropriate to the qualifying costs, but they do not count toward the 250 employee maximum for preliminarily qualifying for the credit
  • grants received that were not included in taxable income will reduce the amount of qualified costs that may be submitted
  • if the amount of the taxpayer's certification by the Service is based on a qualified investment expected to be made, and the amount certified exceeds the taxpayer's actual qualified investment for 2009 and 2010, then the credit allocated to the taxpayer shall be reduced by 50 percent of the difference between the qualified investment certified by the Service and the taxpayer's actual qualified investment
  • any denials cannot be appealed
  • government and tax exempt entities are not eligible applicants.

Certain Medical Devices May Qualify

Appendix A of the Notice states that to qualify, a QTDP must be a product, process, or technology that furthers the delivery or administration of therapeutics and that the term "therapeutics" means drugs or medical devices, as those terms are defined in Section 201(g) and (h) of the FFDCA, 21 U.S.C. 321(g) and (h). Biologics that are licensed under the PHSA will generally be either drugs or medical devices.

The Appendix has an example of a drug-eluting stent or infusion pump as meeting the requirements of this provision. A medical device, or other product, process or technology, however, that does not further the delivery or administration of a drug or medical device would not meet the requirements of the Notice because those types of products do not deliver or administer a therapeutic. Products, processes or technologies that deliver other therapies that are not therapeutics, such as speech, physical and cognitive therapies, are excluded.

Certification Procedures

To receive a certification, the taxpayer must submit for each project a Form 8942, "Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program," a penalties of perjury statement, a power of attorney, and a consent for public disclosure of the certification.

Also, applicants will need a Data Universal Numbering System (DUNS) number from Dun and Bradstreet when applying. Taxpayers may want to get a DUNS number ahead of time due to the short window to apply.

Important Dates

Form 8942 will be released by the Treasury on June 21, 2010, and the complete application must be submitted by July 21, 2010, giving eligible taxpayers a 30-day window to apply. IRS will make award certifications no later than Oct. 29 according to the Notice.

Pepper Perspective

The Notice makes it clear that the IRS and HHS will be looking for projects that can reasonably result in new ways to meet unmet medical needs; to reduce long-term U.S. health care costs; to prevent, treat, or detect chronic illnesses; or to significantly further the goal of curing cancer within 30 years. Applicants should clearly state the illness the company is attempting to cure or treat, the need that exists for a cure or treatment, and how it will overcome any barriers to the cure. The Notice also makes it clear that applicants need to demonstrate that their science will result in future U.S. jobs and make the U.S. economically competitive around the world.

This process will be very competitive and the Notice states that the IRS anticipates 1,200 applicants. With those criteria in mind, eligible applicants should begin to gather their data and information in anticipation of the 30-day window. Applicants are encouraged to follow all of the instructions in the Notice since applications that fail to comply with the instructions set will not be considered.


1 Unless otherwise stated, all references to "Section" are to the Internal Revenue Code of 1986 (the Code), and all references to "Treas. Reg. Section." are to the Treasury Regulations promulgated thereunder (the Regulations).

The material in this publication is based on laws, court decisions, administrative rulings, and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This article is republished with permission of Pepper Hamilton, LLP. Further duplication without the permission of Pepper Hamilton, LLP is prohibited. All rights reserved.