1. Presented by: Jason Brown, CPA and Marty Cass, CPA Date: June 14, 2010 Email: jbrown@alpernfl.com and mcass@alpernfl.comjbrown@alpernfl.commcass@alpernfl.com Qualifying Therapeutic Discovery Project Tax Credit or Grant

2. Qualifying Therapeutic Discovery Project  Before the 2010 Health Care Act, the only credits available for drug development were R&D and orphan drug credits.  The QTDP credit is equal to 50% of the “qualified investment” for any “qualifying therapeutic discovery project” of an “eligible taxpayer”.

3. Who is an Eligible Taxpayer?  An “eligible taxpayer” employs no more than 250 employees in all businesses at the time of the submission of the application.

4.  A qualifying discovery project is designed to: –Treat or prevent disease or conditions by conducting pre-clinical activities, clinical trial studies or research for securing approval under the Public Health Service Act 351§(a); –Diagnose diseases or conditions or determine molecular factors related to companion drugs and diagnostics to guide therapeutic decisions; or –Develop a product, process or technology to further the delivery or administration of therapeutics. What is a Qualifying Therapeutic Discovery Project?

5. What is a Qualified Investment?  A “qualified investment” is the total costs in the tax year for expenditures necessary for and directly related to the conduct of a “QTDP”.  An investment is considered a qualified investment if made in 2009 or 2010.  The credit still applies even if the product is not placed in service until after 2010.

6.  Excluded Costs: –Remuneration for CEO –Interest expense –Facility maintenance  Mortgage or rent payments  Insurance payments  Utility and maintenance –General and administrative expenses. Excluded Costs

7. Ineligible Investments  A credit is not allowed for: –Bonus depreciation investments –Investments funded by treasury grants –Investments financed with non-qualified non-recourse debt –Investments in property that is:  Predominantly located outside of the US;  Primarily used for non-transient lodging; or  Used by governmental entities or by foreign persons.

8. Certification Program - What’s the Catch?  The total credits that can be allocated under the program cannot exceed $1 billion for the 2 tax years.  Companies will need to apply and compete with each other for the credit.  One taxpayer can not receive more than $5 million as a grant or credit.  Once the money’s gone, it’s gone.

9.  In determining qualifying projects, the TD will consider the projects’ potential to: –Result in new therapies to treat unmet need or to prevent, detect, and treat chronic illness; –Reduce long-term health care costs in the United States; or –Significantly advance the goal of curing cancer within a 30-year period.  Treasury Department will consult with Dept of Human and Health Services (HHS) Criteria Used to Award the Credit

10.  Projects must also have the greatest potential to: –Create and sustain (directly or indirectly) high quality, high-paying jobs in the US; and –Advance US competitiveness in life, biological, and medical sciences.

11. Other Restrictive Rules  Other restrictive rules include: –Recapture of the credit if property is disposed of or ceases to meet credit requirements. –Reduction in basis for QTDP credit allowed in relation to property subject depreciation. –Denial of deductions where double benefit. –Denial of research credit or orphan drug credit when taking QTDP credit.

12. Grants in Lieu of Credit for QTDP’s  If a company does not have a tax liability, it could elect to apply for a grant instead of a credit.  The grant will not be taxable.  Similar to the credit, the grant will be in the amount of 50% of the costs related to a qualified investment in a QTDP.

13. What Entities Are Not Eligible for a Grant?  Entities that are ineligible include: –Any federal, state, or local government; –Any tax-exempt organization; –Any entity considered to be a clean renewable energy bond lender, a cooperative electric company, or a governmental body; or –Any partnership or other pass-through entity with an owner that falls within any of the categories above.

14. Application Procedures for the Credit or Grant  The applicant must elect on Form 8942 to apply for a credit or grant for 2009 or 2010.  The applicant may apply for a credit or grant for 2009 only, 2010 only, or both 2009 and 2010.  Applicant may amend Form 8942 to switch from credit to grant or grant to credit.

15. Application Procedures  TD will authorize payment to the certified applicant for 2009 tax year by October 29, 2010 by letter. No appeal will be allowed.  An application must be submitted for each project seeking certification.  Must include DUNS Number.  The Service and HHS may reject an application that does not follow the instructions.  An application for certification will not be considered in the primary allocation round unless filed by July 21, 2010.

16. Form 8942  Form will be released no later than June 21, 2010.  A description of the applicant's qualified investments for 2009, 2010 or both.  The number and average salary of full and part-time employees and contractors working on the project.  Terminated or suspended projects are ineligible.  You will need to state if the project: –Will produce a new or significantly improved technology, or a new application or significant improvement to an existing technology. –Is expected to lead to the construction or use of a contract production facility in the United States in the next 5 years.

17. Form 8942  HHS will determine if the project shows a “reasonable potential” to meet one or more of the goals specified in the statute.  The form also requires, as stated, that the applicant provide written narratives with respect to certain questions.  Confidential information can be stamped “not to be released to persons outside of the Government, except for purposes of review.”

18. Project Information Memorandum  Determines if project is a QTDP and shows reasonable potential.  Provide overview of project including a description of the product, process or technology under development.  May not exceed 250 words.  If the project involves a new therapy, explain why that therapy is novel.

19. Questions to Determine if You Are a QTDP 1.Is the project –designed to develop a product to treat or prevent a disease or condition; –by conducting pre-clinical activities, clinical trials, or clinical studies, and –for the purpose of securing approval of a product under section 505(b) of the Federal Food, Drug, and Cosmetic Act or section 351(a) of the Public Health Service Act? 2.Is the project designed to diagnose a disease or condition?

20. Questions to Determine if You Are a QTDP 3.Is the project designed to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions? 4.Is the project designed to develop a product, process, or technology to further the delivery or administration of therapeutics?  If you can’t answer yes to any of questions 1 – 4, you don’t qualify, not to exceed 50 words per answer.

21. Questions to See if Project Shows Reasonable Potential to Meet Goals of Statute 5.Is the project likely to result in one or more new therapies? 6.If the answer to above question is Yes, are the new therapy(ies) expected to: a)treat areas of unmet medical need? b)prevent, detect, or treat chronic or acute diseases or conditions?

22. Questions to See if Project Shows Reasonable Potential to Meet Goals of Statute 7.Is the project likely to reduce long-term health care costs in the United States? –Explains how project reduces health care costs –Provide estimate of savings and demonstrate potential to achieve these savings. 8.Is the project likely to significantly advance the goal of curing cancer within the next 30 years?  Must answer yes to 5 and 6a or 6b, or 7 or 8 to qualify, not to exceed 50 word per answer.

23. Questions to See if Project Shows Reasonable Potential to Meet Goals of Statute 9.Explain the scientific rationale, based on prior conceptual and empirical work, which supports the belief that the proposed project will lead to the outcome the applicant has identified above. –May submit up to five literature citations –Explain the R &D plan –Describe the scientific evidence relied upon –Not to exceed 250 words

24. Questions to See if Project Shows Reasonable Potential to Meet Goals of Statute 10.Describe the stage of development of the project, including a description of pre-clinical and clinical trial results. –If FDA regulated product, status of application –Description of the testing completed and/or contemplated. –If the project involves testing in humans, information about the phase(s) completed. –Summarize the results of the trials –Not to exceed 250 words.

25. Questions to See if Project Shows Reasonable Potential to Meet Goals of Statute 11.Describe the resources, management experience and organizational capacity of the applicant and explain how they will support successful completion of the project. Include in this description: –Statement of the revenue levels and sources for this project and for proposed R & D –A description of any significant public or private investment –A description of any strategic partnerships –Not to exceed 250 words.

26. HHS Criteria to Make Determination  An analysis of the scientific rationale for the project.  The current stage of development of the project.  And the evidence that the applicant has the capacity to bring the project to fruition.  The HHS will certify an amount of qualified investment.

27. Tips for Preparing Application  Begin data collecting now, including detailing descriptions of each project.  Demonstrate why you are different from your competition.  Get creative, look for studies by peers or other ways to help support how your project will create jobs, reduce costs, etc.  This is the government – Write in laymen’s terms  Focus on social benefits

28. What Should You Do Now?  Draft applications that are properly documented and that clearly justify expenditures.  Engage outside resources and access industry associations and organizations.  Hire an experienced tax accountant and possibly a grant writer.

29. How Can We Help? We can assist you with:  Determining which projects may qualify.  Allocating eligible and ineligible costs.  Preparing Form 8942 for the credit or grant.  Providing audit support and defense.

30. Contact Information For more information on the Qualified Therapeutic Discovery Project Credit and how we can help you apply for this credit, please contact: Alpern Rosenthal Phone Number: 561-689-7888 Email: jbrown@alpernfl.com