Do SBIR Funded Costs Qualify for the Therapeutic Tax Credit?

After some serious deliberation, our conclusion is we doubt it, but it’s not clear, and it hasn’t been excluded – yet.

Argument Against – Legislative History

The Internal Revenue Code and regulations contain numerous references that forbid “double dipping”.  Recently released regulations under the heading of “Qualified Investments” list five types of costs that are explicitly excluded from the credit, including the as yet undefined “other expenses as determined by the IRS”.

Some believe that according to legislative history, Congress’ intention is that the Treasury will not allow credits for expenditures related to activities described in section 41(d)(4) – which exclude expenditures for “funded research” and activities conducted outside the US.  This was the method of ultimately disallowing funded research in the clean energy legislation recently.

Argument For – The IRS does not exclude it

Section 4.01(4) of the Therapeutic Regulations provides that the amount of any qualifying investment is reduced by the amount of any grant received by the applicant that is not included in income under section 61 of the Code, unless the grant can only be used for costs not included as a qualified investment.  The IRS regulations currently reasons that if NIH payments are includable in income (which they are), then those payments to make otherwise qualified investments should be counted.

This is, in fact, the position taken by Candace Fisher of the Small Business and Self-Employed Division of the IRS who was a point of contact given to us by Jo Anne Goodnight, NIH SBIR/STTR Program Coordinator.

Other Important New Information

One of the most important things to have occurred recently is that the “race” aspect of the $1,000,000,000 credit has been eliminated.  According to the latest IRS Notice, the application Form 8942 will be released no later than June 21, 2010 and applications must be submitted using the Form 8942 by July 21, 2010 – not first come, first serve as previously stated.

While the official application form is not yet available, Appendix A to the Notice describes, in detail, the content and format of information to be provided by an applicant, as well as the questions that must be answered in an applicant’s Project Information Memorandum to be filed with the Form 8942.

The Act requires quick disposition of applications.  Following a preliminary review period to conclude on September 30, 2010, the IRS is required to approve or deny applications within 30 days. Applicants will be advised of the IRS’s determination by October 29, 2010.

Conclusions

The Treasury estimates that it will take approximately 12 hours to apply for the credit, so until we hear otherwise from the IRS, our advice is to go for it, but don’t get your hopes too high.

Edward G. Jameson, CPA

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