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1 1 (March 11, 2022)

handle is hein.crs/govefkf0001 and id is 1 raw text is: Congressional ~.Research Service Tax Treatment of Research Expenses: Current Law and Policy Issues March 11, 2022 Companies are allowed to deduct the ordinary and necessary expenses they pay or incur in determining their taxable income. Under Section 162(a) of the federal tax code, current expenses (e.g., wages and salaries) are written off in full in the year when they are paid or incurred. Capitalized expenses (e.g., cost of equipment or patents) are recovered over longer periods under Sections 167 and 168, as the economic value of the acquired assets lasts longer than one year. This Insight discusses the current federal tax treatment of expenses companies pay or incur in investing in research and development (R&D) and the policy issues this treatment raises. Tax Treatment of Research Expenses Before 1954, the federal tax treatment of the expenses companies incurred or paid in undertaking R&D entailed a multitude of disputes between companies and the Internal Revenue Service (IRS). The disputes mainly concerned whether or not the expenses should be capitalized and amortized over five or more years as the IRS maintained. Congress clarified this treatment in 1954 by creating Section 174. The provision gave companies two options for recovering their research and experimental expenses (REEs). One option was to deduct the entire amount of such expenses in the year when they were paid or incurred under Section 174(a), a treatment called expensing. The second option was to capitalize REEs and amortize them over a period of five or more years under Section 174(b). Congress added a third option in 2004 with the enactment of Section 59(e), which allowed companies to amortize REEs over 10 years. REEs are defined as R&D costs in the experimental or laboratory sense. The following expenses qualify for Section 174 treatment: (1) the wages and salaries of researchers, (2) the materials and supplies used in qualified research, and (3) the costs of operating and maintaining research facilities (e.g., rent, utilities, and property insurance). The cost of equipment and buildings used to perform research, however, must be capitalized and recovered through depreciation allowances. Congressional Research Service https://crsreports.congress.gov IN11887 CRS INSIGHT Prepared for Members and Committees of Congress

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