Take a fresh look at your federal accounting practices. Increased competition, cuts in overall spending, and changes in compliance requirements have made it essential to be at the top of your game. Regardless of your experience with federal accounting, this class will provide new and updated information and strategies to increase your understanding of government contract accounting. You will gain the knowledge to implement a solid accounting system earning your company a competitive advantage.
There are multiple provisions governing R&D expenses. Since the section covering credits is the most restrictive, that is the section I am touching on here.
Research & experimental costs are REASONABLE costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product OR the appropriate design of the product.
Whether costs qualify for research and experimental costs depends on the nature of the activity to which the costs relate rather than the nature of the product or improvement being developed or the level of technological advancement.
“Experimental or Laboratory” – intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.
Certain items are specifically excluded as R&D:
The ordinary testing or inspection of materials or products for quality control
Efficiency surveys
Management studies
Consumer surveys
Advertising or promotions
The acquisition of another’s patent, model, production or process
Research in connection with literary, historical, or similar projects.
Land and depreciable property, although in certain cases, depreciation may be a section 174 expense
Exploration expenditures
Patent procurement generally qualifies as a Sec 174 R&D expense, but does not qualify as a Sec 41 R&D expense as it relates to credits.
In order to satisfy the technological in nature requirement – the process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science.
The taxpayer must intend to apply the information being discovered to develop a new or improved business component of the taxpayer. A business component is any product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, license, or used in a trade or business of a taxpayer. The key is that a taxpayer must be able to tie the research it is claiming for the credit to the relevant business component.
Process of Experimentation:
Identify the uncertainty
Identify one or more alternatives
Identify and conduct process of evaluating the alternatives