I.R.C. § 174(a) In General —
In the case of a taxpayer's specified research or experimental expenditures for any
taxable year—
I.R.C. § 174(a)(1) —
except as provided in paragraph (2), no deduction shall be allowed for such expenditures,
and
I.R.C. § 174(a)(2) —
the taxpayer shall—
I.R.C. § 174(a)(2)(A) —
charge such expenditures to capital account, and
I.R.C. § 174(a)(2)(B) —
be allowed an amortization deduction of such expenditures ratably over the 5-year
period (15-year period in the case of any specified research or experimental expenditures
which are attributable to foreign research (within the meaning of section 41(d)(4)(F)))
beginning with the midpoint of the taxable year in which such expenditures are paid
or incurred.
I.R.C. § 174(b) Specified Research Or Experimental Expenditures —
For purposes of this section, the term “specified research or experimental expenditures”
means, with respect to any taxable year, research or experimental expenditures which
are paid or incurred by the taxpayer during such taxable year in connection with the
taxpayer's trade or business.
I.R.C. § 174(c) Special Rules
I.R.C. § 174(c)(1) Land And Other Property —
This section shall not apply to any expenditure for the acquisition or improvement
of land, or for the acquisition or improvement of property to be used in connection
with the research or experimentation and of a character which is subject to the allowance
under section 167 (relating to allowance for depreciation, etc.) or section 611
(relating to allowance for depletion); but for purposes of this section allowances
under section 167, and allowances under section 611, shall be considered as expenditures.
I.R.C. § 174(c)(2) Exploration Expenditures —
This section shall not apply to any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any deposit of ore or
other mineral (including oil and gas).
I.R.C. § 174(c)(3) Software Development —
For purposes of this section, any amount paid or incurred in connection with the development
of any software shall be treated as a research or experimental expenditure.
I.R.C. § 174(d) Treatment Upon Disposition, Retirement, Or Abandonment —
If any property with respect to which specified research or experimental expenditures
are paid or incurred is disposed, retired, or abandoned during the period during which
such expenditures are allowed as an amortization deduction under this section, no
deduction shall be allowed with respect to such expenditures on account of such disposition,
retirement, or abandonment and such amortization deduction shall continue with respect
to such expenditures.
(Aug. 16, 1954, ch. 736, 68A Stat. 66; Oct. 4, 1976,
Pub. L. 94-455, title XIX, Sec. 1901(a)(30), 1906(b)(13)(A), 90 Stat. 1769, 1834; Sept. 3, 1982,
Pub. L. 97-248, title II, Sec. 201(d)(9)(B) formerly Sec. 201(c)(9)(B), 96 Stat. 420, redesignated
Jan. 12, 1983, Pub.
L. 97-448, title III, Sec. 306(a)(1)(A)(i), 96 Stat. 2400; amended Oct. 22, 1986, Pub. L. 99-514, title VII, Sec. 701(e)(4)(D), 100 Stat. 2343; Nov. 10, 1988, Pub. L. 100-647, title I, Sec. 1007(g)(5), 102 Stat. 3435; Dec. 19, 1989, Pub. L. 101-239, title VII, Sec. 7110(d), 103 Stat. 2325; Pub. L. 113-295, Div. A, Sec. 221(a)(31), 221(a)(32), Dec. 19, 2014, 128 Stat. 4010; Pub. L. 115-97, title I, Sec. 13206(a), Dec. 22, 2017.)
BACKGROUND NOTES
AMENDMENTS
2017 - Sec. 174. Pub. L. 115-97, Sec. 13206(a), amended Sec. 174. Before amendment, it read as follows:
“Sec. 174. Research And Experimental Expenditures
“(a) Treatment As Expenses
“(1) In General.—A taxpayer may treat research or experimental expenditures which
are paid or incurred by him during the taxable year in connection with his trade or
business as expenses which are not chargeable to capital account. The expenditures
so treated shall be allowed as a deduction.
“(2) When Method May Be Adopted
“(A) Without Consent.—A taxpayer may, without the consent of the Secretary, adopt
the method provided in this subsection for his first taxable year for which expenditures
described in paragraph (1) are paid or incurred.
“(B) With Consent.—A taxpayer may, with the consent of the Secretary, adopt at any
time the method provided in this subsection.
“(3) Scope.—The method adopted under this subsection shall apply to all expenditures
described in paragraph
(1). The method adopted shall be adhered to in computing taxable income for the taxable
year and for all subsequent taxable years unless, with the approval of the Secretary,
a change to a different method is authorized with respect to part or all of such expenditures.
“(b) Amortization Of Certain Research And Experimental Expenditures
“(1) In General.—At the election of the taxpayer, made in accordance with regulations
prescribed by the Secretary, research or experimental expenditures which are—
“(A) paid or incurred by the taxpayer in connection with his trade or business,
“(B) not treated as expenses under subsection
(a), and
“(C) chargeable to capital account but not chargeable to property of a character
which is subject to the allowance under section 167 (relating to allowance for depreciation,
etc.) or section 611 (relating to allowance for depletion),
“may be treated as deferred expenses. In computing taxable income, such deferred expenses
shall be allowed as a deduction ratably over such period of not less than 60 months
as may be selected by the taxpayer (beginning with the month in which the taxpayer
first realizes benefits from such expenditures). Such deferred expenses are expenditures
properly chargeable to capital account for purposes of section 1016(a)(1) (relating
to adjustments to basis of property).
“(2) Time For And Scope Of Election.—The election provided by paragraph (1) may be
made for any taxable year, but only if made not later than the time prescribed by
law for filing the return for such taxable year (including extensions thereof). The
method so elected, and the period selected by the taxpayer, shall be adhered to in
computing taxable income for the taxable year for which the election is made and for
all subsequent taxable years unless, with the approval of the Secretary, a change
to a different method
(or to a different period) is authorized with respect to part or all of such expenditures.
The election shall not apply to any expenditure paid or incurred during any taxable
year before the taxable year for which the taxpayer makes the election.
“(c) Land And Other Property.—This section shall not apply to any expenditure for
the acquisition or improvement of land, or for the acquisition or improvement of property
to be used in connection with the research or experimentation and of a character which
is subject to the allowance under section 167
(relating to allowance for depreciation, etc.) or section 611 (relating to allowance
for depletion); but for purposes of this section allowances under section 167, and
allowances under section 611, shall be considered as expenditures.
“(d) Exploration Expenditures.—This section shall not apply to any expenditure paid
or incurred for the purpose of ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral (including oil and gas).
“(e) Only Reasonable Research Expenditures Eligible.—This section shall apply to a
research or experimental expenditure only to the extent that the amount thereof is
reasonable under the circumstances.
“(f) Cross References
“(1) For adjustments to basis of property for amounts allowed as deductions as deferred
expenses under subsection
(b), see section 1016(a)(14).
“(2) For election of 10-year amortization of expenditures allowable as a deduction
under subsection (a), see section 59(e).”
2014 -
Subsec. (a)(2)(A). Pub. L. 113-295, Div. A, Sec. 221(a)(31), amended subpar. (A). Before amendment, it read as follows:
“(A) Without Consent.—A
taxpayer may, without the consent of the Secretary, adopt the method
provided in this subsection for his first taxable year—
“(i) which begins after December 31, 1953, and ends after August 16, 1954, and
“(ii) for which expenditures described in paragraph (1) are paid or incurred.”
Subsec. (b)(2). Pub. L. 113-295, Div. A, Sec. 221(a)(32), amended par. (2) by striking “beginning after December
31, 1953”.
1989 -
Subsecs. (e), (f). Pub. L. 101-239 added subsec. (e) and redesignated former subsec. (e) as (f).
1988 -
Subsec. (e)(2). Pub. L. 100-647 substituted “section 59(e)” for “section 59(d)”.
1986 -
Subsec. (e)(2). Pub. L. 99-514 substituted “section 59(d)” for “section 58(i)”.
1982 -
Subsec. (e). Pub. L. 97-248, Sec. 201(d)(9)(B), substituted “Cross references”
for “Cross reference” in heading, designated existing provisions as par. (1), and
added par. (2).
1976 -
Subsec. (a)(2)(A). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
Subsec. (a)(2)(A)(i). Pub. L. 94-455, Sec. 1901(a)(30), substituted “August 16, 1954” for “the date on which this title is enacted” after
“ends after”.
Subsecs. (a)(3), (b)(1),
(2). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out “or his delegate”
after “Secretary”.
EFFECTIVE DATE OF 2017 AMENDMENT
Amendment by Pub. L. 115-97, Sec. 13206(a), effective for amounts paid or incurred in taxable years beginning after December
31, 2021. Pub. L. 115-97, Sec. 13206(b) provided that:
“(b) CHANGE IN METHOD OF ACCOUNTING.—The amendments made by subsection (a) shall be
treated as a change in method of accounting for purposes of section 481 of the Internal Revenue Code of 1986 and—
“(1) such change shall be treated as initiated by the taxpayer,
“(2) such change shall be treated as made with the consent of the Secretary, and
“(3) such change shall be applied only on a cut-off basis for any research or experimental
expenditures paid or incurred in taxable years beginning after December 31, 2021,
and no adjustments under section 481(a) shall be made.”
EFFECTIVE DATE OF 2014 AMENDMENTS
Amendments by Pub. L. 113-295, Div. A, Sec. 221(a), effective on the date of the enactment of this Act [Enacted:
Dec. 19, 2014].
Section 221(b)(2) of Pub. L. 113-295, Div. A, provided the following Savings Provision:
“(2)
SAVINGS PROVISION.—If—
“(A)
any provision amended or repealed by the amendments made by this section applied to—
“(i)
any transaction occurring before the date of the enactment of this Act [Enacted: Dec.
19, 2014],
“(ii)
any property acquired before such date of enactment, or
“(iii)
any item of income, loss, deduction, or credit taken into account before such date
of enactment, and
“(B)
the treatment of such transaction, property, or item under such provision would (without
regard to the amendments or repeals made by this section)
affect the liability for tax for periods ending after date of enactment, nothing in
the amendments or repeals made by this section shall be construed to affect the treatment
of such transaction, property, or item for purposes of determining liability for tax
for periods ending after such date of enactment.”
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 applicable to taxable years beginning after Dec. 31, 1989, see section 7110(e)
of Pub. L. 101-239, set out as a note under section 41 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax
Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Amendment by Pub. L. 99-514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions
and qualifications, see section 701(f) of Pub. L. 99-514, set out as an Effective Date note under section 55 of this title.
EFFECTIVE DATE OF 1982 AMENDMENT
Amendment by Pub. L. 97-248 applicable to taxable years beginning after Dec. 31, 1982, see section 201(e)(1)
of Pub. L. 97-248, set out as a note under section 5 of this title.
APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99-514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES
For applicability of amendment by Pub. L. 99-514 notwithstanding any treaty obligation of the United States in effect on Oct. 22,
1986, with provision that for such purposes any amendment by title I of Pub. L. 100-647 be treated as if it had been included in the provision of Pub. L. 99-514 to which such amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100-647, set out as a note under section 861 of this title.
ALLOCATION OR APPORTIONMENT TO SOURCES WITHIN UNITED STATES OF RESEARCH AND EXPERIMENTAL
EXPENDITURES PAID OR INCURRED FOR RESEARCH ACTIVITIES CONDUCTED IN UNITED STATES;
2-YEAR PROGRAM
Pub. L. 97-34, title II, Sec. 223(a), Aug. 13, 1981, 95 Stat. 249, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘In the case of the taxpayer's first
2 taxable years beginning within 2 years after the date of the enactment of this Act
(Aug. 13, 1981), all research and experimental expenditures (within the meaning of
section 174 of the Internal Revenue Code of 1986 (formerly I.R.C. 1954)) which are paid or incurred in such year for research activities conducted in the
United States shall be allocated or apportioned to sources within the United States.'
