Proposed R&E deduction regulations include favorable guidance on depreciable property, other issues

September 2013


Newly proposed Section 174 regulations address several long-standing issues related to the deduction for research or experimental (R&E) expenditures, such as whether subsequent sales of tangible property created through R&E affect the deductibility of otherwise qualified expenditures and whether expenditures for refining the design of a product once production has begun can qualify. The proposed rules also include a new “shrinking-back” provision applicable when the Section 174 requirements are met with respect to certain components, but not with respect to the product as a whole.

Taxpayers likely will find no surprises in some aspects of these regulations, but should consider taking a fresh look at their procedures for collecting documentation and support. Note: Meeting the Section 174 requirements is one prerequisite for eligibility for the Section 41 research credit.

The new regulations are proposed to apply to tax years ending on or after the date final regulations are published. However, the IRS states that it will not challenge return positions consistent with the proposed regulations and that taxpayers therefore may rely on the proposed rules until final regulations are published.

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