Strategy: Plow ahead with research activities. Separate from the R&D credit, you may qualify for business research tax deductions. So, you’ll get some tax bang from your bucks.
Depending on your situation, you may be able to write off the expenses in the tax year in which you incur them, or if it suits your purposes, you can stretch out the tax benefits.
Here’s the whole story: Normally, you treat research and experimentation activity expenses as capital expenses. However, if the costs qualify, you can write off expenses currently or elect to amortize them over a period of time. You must charge to a capital account any expenses you don’t currently deduct or amortize.
What expenses qualify for deductions? Reasonable business activity costs providing information that eliminates uncertainty about a product development or improvement qualify. An uncertainty exists if the available information doesn’t establish how to develop or improve the product or its design (see related article).
In other words, whether an expense qualifies depends on the activity, not the nature of the product, improvement being developed or the technological advancement level.
Note that many of the same expenses may qualify for the R&D credit. But, if you claim the credit this year (a credit is generally preferable to a deduction), you must reduce the expenses available for the deduction.
Generally, you must make the election to deduct research and experimentation expenses in the first years that you incur the expenses.
Stretch out tax deductions
Say you expect to show a bigger profit in the next few years when the research pays off. Instead of taking current deductions, you can elect to amortize qualified expenses over 60 months or more. The amortization period begins in the month you first receive an economic benefit from the research.
Tip: Instead of amortizing expenses or deducting them currently, you can choose to write off qualified expenses ratably over a 10-year period. That alternative write-off begins with the tax year in which you incurred the expenses.