The US Orphan Drug Tax Credit

From the FDA page on the Orphan Drug Tax Credit.

Incentives

TAX CREDIT
(See Footnote 1 below)
FOR TESTING EXPENSES FOR
DRUGS FOR RARE DISEASES OR CONDITIONS

Introduction
Section 45C of the Internal Revenue Code of 1954 allows a credit against tax, up to 50 percent of certain clinical testing expenses related to the use of a drug for a rare disease or condition after it is designated as an orphan drug.

Public Law 104-188, in addition to reauthorizing the tax credit, created a carry-back carry-forward eligibility for certain periods.

Public Law 105-34 in 1997 made the tax credit provisions permanent from May 31, 1997 forward along with the carry backcarry forward feature. Previously, this section required reauthorization by Congress each year. The tax credit provision is administered by the Internal Revenue Service and specific questions about applicability and technical matters should be directed to that agency.
The text of the tax provisions follow.

SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS

FOR RARE DISEASES OR CONDITIONS (See Footnote 2 below).

(a) GENERAL RULE. —.For purposes of section 38, the credit determined under this section for the taxable year is an amount equal to 50 percent of the qualified clinical testing expenses for the taxable year.

(b) QUALIFIED CLINICAL TESTING EXPENSES.—For purposes of this section—

(1) QUALIFIED CLINICAL TESTING EXPENSES.—

(A) IN GENERAL.—Except as otherwise provided in this paragraph, the term “qualified clinical testing expenses” means the amounts which are paid or incurred by the taxpayer during the taxable year which would be described in subsection (b) of section 41 if such subsection were applied with the modifications set forth in subparagraph (B).
(B) MODIFICATIONS.—For purposes of subparagraph (A), subsection (b) of section 41 shall be applied—
(i) by substituting “clinical testing” for “qualified research” each place it appears in paragraphs (2) and (3) of such subsection, and
(ii) by substituting “100 percent” for “65 percent” in paragraph (3)(A) of such subsection.
(C) EXCLUSION FOR AMOUNTS FUNDED BY GRANTS, ETC.—The term” qualified clinical testing expenses” shall not include any amount to the extent such amount is funded by any grant, contract, or otherwise by another person (or any governmental entity).
(D) SPECIAL RULE—For purposes of this paragraph, section 41 shall be deemed to remain in effect for periods after June 30, 1992.

(2) CLINICAL TESTING.—

(A) IN GENERAL—The term “clinical testing” means any human clinical testing–

(i) which is carried out under an exemption for a drug being tested for a rare disease or condition under section 505(I) of the Federal Food, Drug, and Cosmetic Act (or regulations issued under such section),

(ii) which occurs—
(I) after the date of such drug is designated under section 526 of such Act, and
(II) before the date on which an application with respect to such drug is approved under section 505(b) of such Act, and
(iii) which is conducted by or on behalf of the taxpayer to whom the designation under such section 526 applies.
(B) TESTING MUST BE RELATED TO USE FOR RARE DISEASE OR CONDITION.—Human clinical testing shall be taken into account under subparagraph (A) only to the extent such testing is related to the use of a drug for the rare disease or condition for which it was designated under section 526 of the Federal Food, Drug, and Cosmetic Act.

(c) COORDINATION WITH CREDIT FOR INCREASING RESEARCH EXPENDITURES.—

(1) IN GENERAL.— Except as provided in paragraph (2), any qualified clinical testing expenses for a taxable year to which an election under this section applies shall not be taken into account for purposes of determining the credit allowable under section 41 for such taxable year.

(2) EXPENSES INCLUDED IN DETERMINING BASE PERIOD RESEARCH EXPENSES.—Any qualified clinical testing expenses for any taxable year which are qualified research expenses (within the meaning of section 41(b)) shall be taken into account in determining base period research expenses for purposes of applying section 41 to subsequent taxable years.

(d) DEFINITION AND SPECIAL RULES.—

(1) RARE DISEASE OR CONDITION.—For purposes of this section, the term “rare disease or condition” means any disease or condition which
(A) affects less than 200,000 persons in the United States, or
(B) affects more than 200,000 persons in the United States, but there is no reasonable expectation that the cost of developing and making available in the United States a drug for disease or condition will be recovered from sales in the United States of such drug.
Determination under the preceding sentence with respect to any drug shall be made on the basis of the facts and circumstances as of the date such drug is designated under section 526 of the Federal Food, Drug, and Cosmetic Act.

(2) SPECIAL LIMITATION ON FOREIGN TESTING.—
(A) IN GENERAL.—No credit shall be allowed under this section with respect to any clinical testing conducted outside the United States unless—
(i) such testing is conducted outside the United States because there is an insufficient testing population in the United States, and
(ii) such testing is conducted by a United States person or by any other person who is not related to the taxpayer to whom the designation under section 526 of the Federal Food, Drug, and Cosmetic Act applies.
(B) SPECIAL LIMITATION FOR CORPORATIONS TO WHICH SECTION 934(b) OR 936 APPLIES.—No credit shall be allowed under this section with respect to any clinical testing conducted by a corporation to which section 934(b) applies or to which an election under section 936 applies.

(3) CERTAIN RULES MADE APPLICABLE.—Rules similar to the rules of paragraphs (l) and (2) of section 41(f) shall apply for purposes of this section.

(4) ELECTION.—This section shall apply to any taxpayer for any taxable year only if such taxpayer reflects (at such time and in such manner as the Secretary may by regulations prescribe) to have this section apply for such taxable year.

See Footnote 3 below and the introductory paragraphs for this topic : the credit is now permanent!
(e) TERMINATION.—This section shall not apply to any amount paid or incurred —
(1) after December 31, 1994, and before July 1, 1996, or
(2) after May 31, 1997 (See Footnote 3 below)

Footnotes
1 The tax provisions are administered by the Internal Revenue Service which has also published implementing regulations: Section 1.28-1, Title 26, Code of Federal Regulations(CFR). For additional or updated tax credit information, contact Christine Ellison, Pass Throughs and Special Industries Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW; Washington, DC 20224; (202) 622-3120.
2 The legal reference for this provision is Section 45C, Title 26 of the United States Code. Only the basic tax credit provisions are included here and the tax code and regulations should be consulted for collateral and related provisions.
3 Public Law 104-188, revised these dates and created a carry-back carry-forward eligibility for certain periods. Section 604 of Public Law 105-34(8/5/97) deleted subsection (e) entirely and provided that the deletion shall be effective for amounts paid or incurred after May 31, 1997. The credit is now permanent. Consult the IRC statute, regulations or IRS staff for further details.

Amendments

2013—Subsec. (b)(1)(D). Pub. L. 112–240substituted “December 31, 2013” for “December 31, 2011”.
2010—Subsec. (b)(1)(D). Pub. L. 111–312substituted “December 31, 2011” for “December 31, 2009”.
2008—Subsec. (b)(1)(D). Pub. L. 110–343substituted “December 31, 2009” for “December 31, 2007”.
2006—Subsec. (b)(1)(D). Pub. L. 109–432substituted “2007” for “2005”.
2004—Subsec. (b)(1)(D). Pub. L. 108–311substituted “December 31, 2005” for “June 30, 2004”.
1999—Subsec. (b)(1)(D). Pub. L. 106–170substituted “June 30, 2004” for “June 30, 1999”.
1998—Subsec. (b)(1)(D). Pub. L. 105–277substituted “June 30, 1999” for “June 30, 1998”.
1997—Subsec. (b)(1)(D). Pub. L. 105–34, § 601(b)(2), substituted “June 30, 1998” for “May 31, 1997”.
Subsec. (b)(2)(A)(ii)(II). Pub. L. 105–115struck out “or 507” after “505(b)”.
Subsec. (e). Pub. L. 105–34, § 604(a), struck out subsec. (e) which read as follows:
“(e) Termination.—This section shall not apply to any amount paid or incurred—
“(1) after December 31, 1994, and before July 1, 1996, or
“(2) after May 31, 1997.”
1996—Pub. L. 104–188, § 1205(a)(1), renumbered section 28 of this title as this section.
Subsec. (a). Pub. L. 104–188, § 1205(d)(1), substituted “For purposes of section 38, the credit determined under this section for the taxable year is” for “There shall be allowed as a credit against the tax imposed by this chapter for the taxable year”.
Subsec. (b)(1)(D). Pub. L. 104–188, § 1204(e), inserted “,?and before July 1, 1996, and periods after May 31, 1997” after “June 30, 1995”.
Subsec. (d)(2) to (5). Pub. L. 104–188, § 1205(d)(2), redesignated pars. (3) to (5) as (2) to (4), respectively, and struck out former par. (2) which read as follows: “Limitation based on amount of tax.—The credit allowed by this section for any taxable year shall not exceed the excess (if any) of—
“(A) the regular tax (reduced by the sum of the credits allowable under subpart A and section 27), over
“(B) the tentative minimum tax for the taxable year.”
Subsec. (e). Pub. L. 104–188, § 1205(b), amended subsec. (e) generally. Prior to amendment, subsec. (e) read as follows: “Termination.—This section shall not apply to any amount paid or incurred after December 31, 1994.”
1993—Subsec. (b)(1)(D). Pub. L. 103–66, § 13111(a)(2), substituted “June 30, 1995” for “June 30, 1992”.
Subsec. (e). Pub. L. 103–66, § 13111(b), substituted “December 31, 1994” for “June 30, 1992”.
1991—Subsec. (b)(1)(D). Pub. L. 102–227, § 102(b), substituted “June 30, 1992” for “December 31, 1991”.
Subsec. (e). Pub. L. 102–227, § 111(a), substituted “June 30, 1992” for “December 31, 1991”.
1990—Subsec. (b)(1)(D). Pub. L. 101–508, § 11402(b)(2), substituted “December 31, 1991” for “December 31, 1990”.
Subsec. (e). Pub. L. 101–508, § 11411, substituted “December 31, 1991” for “December 31, 1990”.
1989—Subsec. (b)(1)(D). Pub. L. 101–239substituted “1990” for “1989”.
1988—Subsec. (b)(1)(D). Pub. L. 100–647, § 4008(c)(1), substituted “1989” for “1988”.
Subsec. (b)(2)(A)(ii)(II). Pub. L. 100–647, § 1018(q)(1), amended subcl. (II) generally. Prior to amendment, subcl. (II) read as follows: “before the date on which an application with respect to such drug is approved under section 505(b) of such Act or, if the drug is a biological product, before the date on which a license for such drug is issued under section 351 of the Public Health Services Act, and”.
1986—Subsec. (b)(1). Pub. L. 99–514, § 231(d)(3)(A)(i), (iv), substituted “41” for “30” in subpars. (A), (B), and (D), and substituted “1988” for “1985” in subpar. (D).
Subsec. (b)(2)(A)(ii)(I). Pub. L. 99–514, § 1879(b)(1)(A), substituted “the date such drug” for “the date of such drug”.
Subsec. (b)(2)(A)(ii)(II). Pub. L. 99–514, § 1879(b)(1)(B), inserted “or, if the drug is a biological product, before the date on which a license for such drug is issued under section 351 of the Public Health Services Act”.
Subsec. (c). Pub. L. 99–514, § 231(d)(3)(A)(i), (ii), substituted “41” for “30” in pars. (1) and (2) and “41(b)” for “30(b)” in par. (2).
Subsec. (d)(1). Pub. L. 99–514, § 1879(b)(2), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “For purposes of this section, the term ‘rare disease or condition’ means any disease or condition which occurs so infrequently in the United States that there is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug. Determinations under the preceding sentence with respect to any drug shall be made on the basis of the facts and circumstances as of the date such drug is designated under section 526 of the Federal Food, Drug, and Cosmetic Act.”
Subsec. (d)(2). Pub. L. 99–514, § 701(c)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “The credit allowed by this section for any taxable year shall not exceed the taxpayer’s tax liability for the taxable year (as defined in section 26 (b)), reduced by the sum of the credits allowable under subpart A and section 27.”
Subsec. (d)(3)(B). Pub. L. 99–514, § 1275(c)(4), struck out “934(b) or” before “936” in heading and amended text generally. Prior to amendment, text read as follows: “No credit shall be allowed under this section with respect to any clinical testing conducted by a corporation to which section 934 (b) applies or to which an election under section 936 applies.”
Subsec. (d)(4). Pub. L. 99–514, § 231(d)(3)(A)(iii), substituted “section 41 (f)” for “section 30 (f)”.
Subsec. (e). Pub. L. 99–514, § 232, substituted “1990” for “1987”.
1984—Pub. L. 98–369, § 471(c), renumbered section 44H of this title as this section.
Subsec. (b)(1)(A), (B), (D). Pub. L. 98–369, § 474(g)(1)(A), substituted “section 30” for “section 44F”.
Subsec. (c)(1). Pub. L. 98–369, § 474(g)(1)(A), substituted “section 30” for “section 44F”.
Subsec. (c)(2). Pub. L. 98–369, § 474(g)(1)(A), (B), substituted “section 30” for “section 44F” and “section 30 (b)” for “section 44F (b)”.
Subsec. (d)(2). Pub. L. 98–369, § 612(e)(1), substituted “section 26 (b)” for “section 25 (b)”.
Pub. L. 98–369, § 474(g)(2), amended par. (2) generally, substituting “shall not exceed the taxpayer’s tax liability for the taxable year (as defined in section 25 (b), reduced by the sum of the credits allowable under subpart A and section 27” for “shall not exceed the amount of the tax imposed by this chapter for the taxable year reduced by the sum of the credits allowable under a section of this subpart having a lower number or letter designation than this section, other than the credits allowable by sections 31, 39, and 43. For purposes of the preceding sentence, the term ‘tax imposed by this chapter’ shall not include any tax treated as not imposed by this chapter under the last sentence of section 53 (a)”.
Subsec. (d)(4). Pub. L. 98–369, § 474(g)(1)(C), substituted “section 30 (f)” for “section 44F (f)”.
Effective Date of 2013 Amendment

Amendment by Pub. L. 112–240applicable to amounts paid or incurred after Dec. 31, 2011, see section 301(d)(1) ofPub. L. 112–240, set out as a note under section 41 of this title.
Effective Date of 2010 Amendment

Amendment by Pub. L. 111–312applicable to amounts paid or incurred after Dec. 31, 2009, see section 731(c) ofPub. L. 111–312, set out as a note under section 41 of this title.
Effective Date of 2008 Amendment

Amendment by Pub. L. 110–343applicable to amounts paid or incurred after Dec. 31, 2007, see section 301(e)(2) ofPub. L. 110–343, set out as a note under section 41 of this title.
Effective Date of 2006 Amendment

Amendment by Pub. L. 109–432applicable to amounts paid or incurred after Dec. 31, 2005, see section 104(a)(3) ofPub. L. 109–432, set out as a note under section 41 of this title.
Effective Date of 2004 Amendment

Amendment by Pub. L. 108–311applicable to amounts paid or incurred after June 30, 2004, see section 301(b) ofPub. L. 108–311, set out as a note under section 41 of this title.
Effective Date of 1999 Amendment

Amendment by Pub. L. 106–170applicable to amounts paid or incurred after June 30, 1999, see section 502(a)(3) ofPub. L. 106–170, set out as a note under section 41 of this title.
Effective Date of 1998 Amendment

Amendment by Pub. L. 105–277applicable to amounts paid or incurred after June 30, 1998, see section 1001(c) ofPub. L. 105–277, set out as a note under section 41 of this title.
Effective Date of 1997 Amendment

Amendment by section 601(b)(2) ofPub. L. 105–34applicable to amounts paid or incurred after May 31, 1997, see section 601(c) ofPub. L. 105–34, set out as a note under section 41 of this title.
Pub. L. 105–34, title VI, § 604(b),Aug. 5, 1997, 111 Stat. 863, provided that: “The amendment made by subsection (a) [amending this section] shall apply to amounts paid or incurred after May 31, 1997.”
Effective Date of 1996 Amendment

Amendment by section 1204(e) ofPub. L. 104–188applicable to taxable years ending after June 30, 1996, and not to be taken into account under section 6654 or 6655 of this title in determining amount of any installment required to be paid for a taxable year beginning in 1997, see section 1204(f) ofPub. L. 104–188, set out as a note under section 41 of this title.
Amendment by section 1205(a)(1), (b), (d)(1), (2) ofPub. L. 104–188applicable to amounts paid or incurred in taxable years ending after June 30, 1996, see section 1205(e) ofPub. L. 104–188, set out as a note under section 45K of this title.
Effective Date of 1993 Amendment

Pub. L. 103–66, title XIII, § 13111(c),Aug. 10, 1993, 107 Stat. 421, provided that: “The amendments made by this section [amending this section and section 41 of this title] shall apply to taxable years ending after June 30, 1992.”
Effective Date of 1991 Amendment

Pub. L. 102–227, title I, § 102(c),Dec. 11, 1991, 105 Stat. 1686, provided that: “The amendments made by this section [amending this section and section 41 of this title] shall apply to taxable years ending after December 31, 1991.”
Pub. L. 102–227, title I, § 111(b),Dec. 11, 1991, 105 Stat. 1689, provided that: “The amendment made by this section [amending this section] shall apply to taxable years ending after December 31, 1991.”
Effective Date of 1990 Amendment

Pub. L. 101–508, title XI, § 11402(c),Nov. 5, 1990, 104 Stat. 1388–473, provided that: “The amendments made by this section [amending this section and section 41 of this title and repealing provisions set out as a note under section 41 of this title] shall apply to taxable years beginning after December 31, 1989.”
Effective Date of 1988 Amendment

Amendment by section 1018(q)(1) ofPub. L. 100–647effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) ofPub. L. 100–647, set out as a note under section 1 of this title.
Amendment by section 4008(c)(1) ofPub. L. 100–647applicable to taxable years beginning after Dec. 31, 1988, see section 4008(d) ofPub. L. 100–647, set out as a note under section 41 of this title.
Effective Date of 1986 Amendment

Amendment by section 231(d)(3)(A) ofPub. L. 99–514applicable to taxable years beginning after Dec. 31, 1985, see section 231(g) ofPub. L. 99–514, set out as a note under section 41 of this title.
Amendment by section 701(c)(2) ofPub. L. 99–514applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 701(f) ofPub. L. 99–514, set out as an Effective Date note under section 55 of this title.
Amendment by section 1275(c)(4) ofPub. L. 99–514applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 1277 ofPub. L. 99–514, set out as a note under section 931 of this title.
Pub. L. 99–514, title XVIII, § 1879(b)(3),Oct. 22, 1986, 100 Stat. 2906, provided that: “The amendments made by this subsection [amending this section] shall apply to amounts paid or incurred after December 31, 1982, in taxable years ending after such date.”
Effective Date of 1984 Amendment

Amendment by section 474(g) ofPub. L. 98–369applicable to taxable years beginning after Dec. 31, 1983, and to carrybacks from such years, see section 475(a) ofPub. L. 98–369, set out as a note under section 21 of this title.
Amendment by section 612(e)(1) ofPub. L. 98–369, applicable to interest paid or accrued after December 31, 1984, on indebtedness incurred after December 31, 1984, see section 612(g) ofPub. L. 98–369, set out as an Effective Date note under section 25 of this title.
Effective Date

Pub. L. 97–414, § 4(d),Jan. 4, 1983, 96 Stat. 2056, provided that: “The amendments made by this section [enacting this section and amending sections 280C and 6096 of this title] shall apply to amounts paid or incurred after December 31, 1982, in taxable years ending after such date.”
Applicability of Certain Amendments by Public Law 99–514 in Relation to Treaty Obligations of United States

For applicability of amendment by section 701(c)(2) ofPub. L. 99–514notwithstanding any treaty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amendment by title I of Pub. L. 100–647be treated as if it had been included in the provision of Pub. L. 99–514to which such amendment relates, see section 1012(aa)(2), (4) ofPub. L. 100–647, set out as a note under section 861 of this title.
Plan Amendments Not Required Until January?1,?1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 ofPub. L. 99–514, as amended, set out as a note under section 401 of this title.