If you’re a business owner who wants to eliminate the uncertainty in developing a new product or improving an existing one, you’re probably engaging in research and development. Unfortunately for them, many business owners don’t realize that in some cases, R&D expenditures may be eligible for a tax deduction. Or perhaps they think that some expenses are deductible when they’re not.
The IRS notes that “R&D expenditures generally include all expenditures incident to the development or improvement of a product.” The term “product” has a wide range in this context and can include:
- Pilot Model
- Similar Property
Other examples of IRS-sanctioned R&D expenses include:
- Obtaining a patent.
- Attorney’s fees that help perfect a patent application.
R&D expenses you cannot deduct include:
- Quality control testing.
- Advertising or promotions.
- Consumer surveys.
- Efficiency surveys.
- Management studies.
- Research in connection with literary or historical or similar projects.
- The acquisition of another’s patent, model, production or process.
You can deduct R&D expenses in one of three ways:
- Current year deduction.
- Amortization of deduction over a period of not less than 60 months.
- If you choose to amortize, you can opt for the Optional Write-Off Method by deducting R&D expenses ratably over a 10-year period beginning with the tax year in which those expenses were incurred.
The IRS explains that you must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize. You are allowed to claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. It also notes that the R&D credit is a nonrefundable tax credit.
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