Research and Experimental Expenditures (R&E) Issues

Starting January 1st, 2022, R&E expenses are not deductible in the year incurred. They need to be capitalized and amortized over 5 or 15 years depending on whether research is done inside or outside the U.S.

R&E expenditures are research and development costs in the experimental or laboratory sense, which includes all costs that are incidental to the development or improvement of a product (Code Sec. 174). Expenditures qualify as research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that eliminates uncertainty as to the development or improvement of a product. Uncertainty (see above) exists if the information available to the taxpayer doesn’t establish (1) the capability or method for developing or improving the product or (2) the appropriate design for the product. The uncertainty test is applied with reference to the information actually available to the taxpayer and not with respect to information that might be reasonably available.

The ultimate success, failure, sale or use of the product is not relevant to a determination of whether the expenses are R&E. Costs can be R&E if paid or incurred after production begins but before uncertainty concerning the development or improvement of the product is eliminated.

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