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1 1 (December 19, 2022)

handle is hein.crs/govejvi0001 and id is 1 raw text is: Congressional ____ R ~fesearch Service Tax Treatment of Research Expenses: Current Law and Policy Issues Updated December 19, 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 underlying 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 some of the policy issues this treatment raises. Tax Treatment of Research Expenses Before 1954, the federal tax treatment of business R&D expenses was characterized by numerous disputes between companies and the Internal Revenue Service (IRS) concerning whether the expenses should be regarded as current or capitalized. 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 known as 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 when it established 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 cost of materials and supplies used in qualified research, and (3) the cost of operating and maintaining research facilities (e.g., rent, utilities, and property insurance). Excluded from qualified expenses is the cost of equipment and buildings used to perform research, which must be capitalized and recovered through applicable depreciation allowances. Congressional Research Service https://crsreports.congress.gov IN11887 CRS INSIGHT Prepared for Members and Committees of Congress

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