Note: this content has been edited from the original version to remove links or other information no longer available. The material was accurate at the time it was issued. Updated July 14, 2010 Q1. Will there be two application periods, one for qualified investments made (or to be made) in 2009 and another for qualified investments made (or to be made) in 2010? A. No. The IRS anticipates that there will be only one allocation round for certification of both 2009 and 2010 qualified investments. For this primary allocation round, an application for certification may be filed with the IRS from the date the application form is released on www.irs.gov through July 21, 2010. See Notice 2010-45 PDF, section 5.02(1). Q2. Are legal expenses related to the protection of intellectual property rights eligible to be qualified investments? A. No. Generally, legal and/or accounting fees are not considered qualified investments. Notice 2010-45, section 4.01(3), states that “the qualified investment for any taxable year with respect to any qualifying therapeutic discovery project will not take into account any cost … (d) that is identified as a service cost under § 1.263A-1(e)(4) of title 26, Code of Federal Regulations.…” Legal services are identified as a service cost in § 1.263A-1(e)(4). Q3. Can licensing fees paid to the National Institutes of Health, the Department of Defense, the Center for Disease Control, other federal agencies, or universities in order to use or gain access to drugs, cell lines or other biological materials or substances in which the federal government or a university holds the licensing rights or otherwise requires payment in order to use or access the materials or substances be included in qualified investment? A. Qualified investment is the aggregate amount of the costs paid or incurred that are directly related to the qualifying therapeutic discovery project. If licensing fees are directly related to a qualifying therapeutic discovery project, then they generally may be treated as a qualified investment. Q4. Can qualified investments associated with tax years that have yet to close be included with applications submitted for the primary allocation round and due July 21, 2010? A. Yes. Qualified investment made, or to be made, in both 2009 and 2010 may be included in the application, which must be filed no later than July 21, 2010. Q5. What type of documentation and records related to the application should applicants maintain in order to satisfy IRS requirements in the event of a future audit of “qualified investment” claims? A. Documentation and recordation should include information sufficient to verify and explain costs treated as qualified investments, e.g., detailed work papers and invoices. Q6. May a non-publicly traded applicant include as part of its qualified investment the employee remuneration costs that are attributable to its CEO and 4 highest paid officers when those individuals constitute the bulk of the company’s work force and/or constitute the primary research or laboratory scientific efforts? A. Section 48D(b)(3)(A) excludes from qualified investment any cost for remuneration for an employee described in § 162(m)(3). Section 162(m)(3), as interpreted by Notice 2007-49, 2007-25 I.R.B. 1429, provides that the term covered employee means any employee of the taxpayer if, as of the close of the taxable year, such employee is the principal executive officer of the taxpayer or is an individual acting in such a capacity, or if the total compensation of such employee for that taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 3 highest compensated officers for the taxable year (other than the principal executive officer or the principal financial officer). For purposes of § 48D, an applicant (whether or not publicly traded) may not treat any portion of the remuneration of its principal executive officer, or an individual acting in such a capacity, as a qualified investment, even where that person is engaged in work directly related to the conduct of a qualifying therapeutic discovery project. In addition, if the applicant is a publicly traded corporation, the applicant may not treat any portion of the remuneration of its 3 highest compensated officers for the taxable year (other than the principal executive officer or the principal financial officer) as a qualified investment, even where those individuals are engaged in work directly related to the conduct of a qualifying therapeutic discovery project. However, if the applicant is not a publicly traded corporation, then the remuneration of its 3 highest compensated officers (and other employees) may be treated as a qualified investment if those individuals engage in work directly related to the conduct of a qualifying therapeutic discovery project, such as primary research or laboratory scientific efforts. Q7. If a taxpayer elects to take a grant in lieu of a credit, is the credit base at the entity level reduced by the amount of nonqualified nonrecourse financing used to finance expenditures included in the qualified investment certified by the Secretary? A. Yes. The at-risk rules under § 49 should be applied at the entity level if the applicant has requested a grant in lieu of a credit. Under § 49, the rules applicable to partnerships and S-corporations provide that the determination of whether a partner’s or shareholder’s allocable share of any financing is nonqualified nonrecourse financing shall be made at the partner or shareholder level. These rules apply for taxpayers applying for a credit. However, taxpayers applying for a grant in lieu of a credit should apply the rules under § 49 at the entity level, not the partner or S-corporation shareholder level. Q8. How must a taxpayer allocate costs that may be attributable to multiple projects? A. Qualified investment that may be necessary for and directly related to multiple projects must be allocated between projects using a reasonable method. There should be no double counting of expenses towards more than one project. Q9. Can a taxpayer include in qualified investment amounts paid to third-party contractors? A. Amounts paid to third-party contractors may be treated as qualified investment only if they are amounts paid or incurred on behalf of the applicant pursuant to an agreement that is entered into prior to the performance of the research services relating to the qualifying therapeutic discovery project and that requires that the research services be performed on behalf of the applicant. If research services are not performed on behalf of the applicant, then the applicant cannot include costs relating to those services in qualified investment. Q10. Because qualified investment does not include property subject to bonus depreciation under § 168(k), § 1400L(b)(1), or § 1400N(D)(1), may the expenses relating to such property be included in qualified investment if the applicant elects out of bonus depreciation? A. If an applicant properly elects out of bonus depreciation, then the expenses may be included in qualified investment if the expenses are necessary for and directly related to the conduct of a qualifying therapeutic discovery project under § 48D(b)(1). Q11. Can a for-profit biotechnology company apply for a grant for a project that could have benefits for a §501(c)(3) organization? A. An applicant that is legally organized as a partnership or other type of pass-thru entity may not apply for a grant if a § 501(c) organization exempt from tax under § 501(a) is a direct or indirect partner or other holder of an equity or profit interest. The fact that a § 501(c) organization may benefit from a project conducted by an applicant does not preclude the applicant from applying for a grant, as long as either (a) the applicant is not legally organized as a partnership or other pass-thru entity, or (b) the organization is not a partner or other holder of an equity or profit interest in the entity. Q12. Because most applicants will not know if they will receive a credit or grant under § 48D for 2009 until after the due date with extensions for filing an income tax return for the 2009 tax year, how should taxpayers that normally claim a credit under § 41 or § 45C handle that item on their 2009 tax returns? A. Such applicants should file a return for 2009 under the assumption that they will not be receiving a credit or grant in lieu of credit under § 48D. If an applicant is certified by the IRS for a 2009 § 48D credit or grant in lieu of credit, then the IRS will provide special processing instructions for the filing of amended 2009 returns to reflect any reduction in credits under §§ 41 and 45C. Q13. Who do I contact with questions I have about Form 8942? A. For further information regarding Form 8942 PDF, please contact Candace Fisher, Internal Revenue Service, Small Business and Self-Employed Division, on 651-312-2109 (not a toll-free number). Q14. If an applicant is contracting with a third party contractor, is the number of contractors shown on Line 22a, the number of individuals that work for the contractor of the third party contractor entity (meaning one contractor)? A. The number of contractors is the number of individuals working for the contractor whose work is directly related to a qualifying therapeutic discovery project. (7/7/10) Q15. Should an applicant provide supporting documentation for the qualifying investment numbers? A. No supporting documentation is required other than the attachments described in the “Assembling the Application” section of the Instructions for the Form 8942. (7/7/10) Q16. What information must be included with the application? A. The following documents are mandatory in order to assure your grant is given consideration. (7/7/10) The Form 8942 with original signature. The Project Information Memorandum with original signature. Q17. What happens if my application is postmarked after July 21, 2010? A. Applications postmarked after July 21, 2010, are considered late applications and will not be considered for certification under the Qualified Therapeutic Discovery Project Program. IRC section 7502 provides that the date of the United States postmark stamped on the cover of an application shall be deemed the date of delivery. Please see Notice 2010-45, section 5.02(2), for further information. (7/14/10) Q18. How can I find out if I have been selected for the grant? Is there any formal notification? Do I need to submit any other forms or information? A. Applicants will be notified by letter postmarked no later than Oct. 29, 2010, whether they have been certified for the grant. During the review process, applicants will be asked to complete Standard Form 1199A, Direct Deposit Sign-Up Form. This form will enable the electronic payment of the grant should the grant application be approved. All grants will be paid electronically. Payment cannot be made until this form is completed. The Form 1199A will be mailed to applicants after receipt of their grant application. All grant applicants will be asked to prepare and return the Form 1199A, and solicitation of this form should not be considered as an indication that the grant application will be certified for payment. While the grant application is being reviewed, status updates will not be available. There will be no interim status information available prior to Oct. 29, 2010. All applicants will be notified —– both those selected and those not selected. (7/14/10) Q19. What rights do I have if my application is not certified? A. Notice 2010-45, section 7.05, provides that a taxpayer does not have a right to a conference relating to any matters under Notice 2010-45. Further, a taxpayer does not have a right to appeal the decisions made under Notice 2010-45 (including the amount of credit allocated to the project and whether or not to certify the project) to any official of HHS or the IRS or the Department of the Treasury. (7/14/10) Q20. When will the grants be paid? A. Notice 2010-45, sections 8.02(6) and 8.02(7) establish the time periods for payment of the grant. For grants certified for calendar year 2009 taxpayers, the IRS will authorize payment to the certified applicant no later than Oct. 29, 2010. For grants certified for fiscal year 2009 taxpayers, payment will vary depending on whether their fiscal year ends on or before, or after Sept. 30, 2010. For those taxpayers whose 2009 fiscal year ends on or before Sept. 30, 2010, the IRS will authorize full payment no later than Oct. 29, 2010. For those taxpayers whose 2009 fiscal year ends after Sept. 30, 2010, the IRS will split the authorized payments between those qualified investment costs incurred by Sept. 30, 2010, and those incurred after that date. For costs incurred by Sept. 30, 2010, payment will be authorized by Oct. 29, 2010. For costs incurred after Sept. 30, 2010, the grant payment will be authorized within 30 days after the end of the applicant’s 2009 taxable year. For grants certified for calendar year 2010 and fiscal year 2010 taxpayers, the payment will be made 30 days after their 2010 taxable year end. (7/14/10) Q21. Are there any special reporting requirements for these grants? A. No. (7/14/10)
