Research and Experimental Costs

Although costs of research and experimentation are generally capital expenses, you can elect to deduct these costs as a current business expense. Alternatively, if you meet certain requirements, you may elect to defer and amortize research and experimental costs over at least 60 months, starting with the month you first receive an economic benefit from the research.

Research and experimental costs defined

Research and 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 a product. Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement.

The costs of obtaining a patent, including attorneys’ fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another’s patent are not research and experimental costs.

Product

The term “product” includes any of the following items:

• Formula
• Invention
• Patent
• Pilot model
• Process
• Technique
• Property similar to the items listed above

The term “product” also includes products used by you in your trade or business or held for sale, lease, or license.

Costs not included

Research and experimental costs do not include expenses for any of the following activities:

• Advertising or promotions
• Consumer surveys
• Efficiency surveys
• Management studies
• Quality control testing
• Research in connection with literary, historical, or similar projects
• The acquisition of another’s patent, model, production, or process

When and how to elect to deduct research and experimental costs

You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS.

If you elect to deduct research and experimental costs, your election is binding for the year it is made and for all later years unless you get IRS approval to make a change.

Research credit

If you pay or incur qualified research expenses, you may be able to take the research credit. For more information about the research credit, see the instructions for Form 6765, Credit for Increasing Research Activities.

Source: IRS Publication 535
Last reviewed: September 15, 2013