by Steve Levy, C.P.A., J.D., Tax Manager with the Donovan CPAs and Advisors
On June 18, 2010, the Internal Revenue Service released Form 8942 and related instructions for applying for the Therapeutic Discovery Credit. At the same time, the U.S. Department of Health and Human Services released the Project Information Memorandum to be completed and submitted along with Form 8942. Both Form 8942 and the Project Information Memorandum can be downloaded by visiting the IRS website for Form 8942 or the HHS website for the Project Information Memorandum.
While generally Form 8942 and the Project Information Memorandum were drafted as expected based on the Notice 2010-45 guidance issued on May 21, 2010, there are a few important instructive details in both documents. The most significant of these details is how the HHS will evaluate the Project Information Memorandum for certification of a project's investment.
Recall that in order for the IRS to consider projects that have the greatest potential to create high-quality, high-paying U.S. jobs and to advance U.S. competitiveness, the HHS must first determine that an applicant's project qualifies and shows reasonable potential in specific medical areas. The HHS does this review by examining the Project Information Memorandum. The HHS review process and scoring system for the Project Information Memorandum can be found at here. In addition to other information, this website contains a decision tree for the review process as well as a reviewer response sheet for grading the responses in the memo. Applicants should be aware of these documents in completing the application.
In terms of Form 8942, the instructions provide an interesting point regarding dividing projects into separate applications. It states that "each project will be evaluated by itself without reference to other projects. Therefore, dividing a project into multiple projects may result in the projects not meeting the selection criteria under section 48D(d)(3)." This seems to imply that if projects are divided into separate projects and applications, this division may diminish the applicant's ability to demonstrate the project's reasonable potential in the specific medical areas or its great potential to create high-quality, high-paying jobs. Therefore, this caution note from the IRS should be considered when deciding whether or not to split a project into separate applications for its components.
A couple of other points to note concern the election for a grant in lieu of a credit. Contrary to Notice 2010-45 §8.02(4), an applicant electing a grant need not register with the Central Contractor Registration. Also, an election for a grant will be effective only if an applicant makes the same election on all its applications for that tax year. If all of the applications do not have the grant election, the election for a grant will be invalid and the applicant will be considered for the credit only. The inconsistency can be remedied by filing an amended Form 8942 for the application that did not originally elect for a grant.
The Form 8942 instructions also help clarify the question of what can be attached to the form. Recall that the Project Information Memorandum is quite restrictive on its word limits to responses as well as attachments. While there are word limitations on Form 8942 for the general description of the project as well as responses addressing a new technology and a contract production facility, the instructions also state that supporting statements and attachments can be attached to the form. Other information contained in the instructions address the requirement that contract research included in investments must be performed on behalf of the applicant, as well as the general requirement that qualified investments are those that are or will be "paid or incurred."
While there still may be unanswered questions such as the definition of a "high-quality, high-paying job" as well as what "other costs" may be considered qualified investments, the release of Form 8942 and the Project Information Memorandum mark the start of the application process for certification of qualified investments under the therapeutic discovery project program. Applicants have until July 21, 2010 to submit their strongest application for consideration of this significant benefit.