§ 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).
Source
(Aug. 16, 1954, ch. 736, 68A Stat. 66; Pub. L. 94–455, title XIX, §§ 1901(a)(30), 1906(b)(13)(A),Oct. 4, 1976
, 90 Stat. 1769, 1834; Pub. L. 97–248, title II, § 201(d)(9)(B) formerly § 201(c)(9)(B), Sept. 3, 1982
, 96 Stat. 420, renumbered § 201(d)(9)(B), Pub. L. 97–448, title III, § 306(a)(1)(A)(i), Jan. 12, 1983
, 96 Stat. 2400; amended Pub. L. 99–514, title VII, § 701(e)(4)(D), Oct. 22, 1986
, 100 Stat. 2343; Pub. L. 100–647, title I, § 1007(g)(5), Nov. 10, 1988
, 102 Stat. 3435; Pub. L. 101–239, title VII, § 7110(d), Dec. 19, 1989
, 103 Stat. 2325; Pub. L. 113–295, div. A, title II, § 221(a)(31), (32), Dec. 19, 2014
, 128 Stat. 4042; Pub. L. 115–97, title I, § 13206(a), Dec. 22, 2017
, 131 Stat. 2111.)Notes
Amendment of Section
Pub. L. 115–97, title I, § 13206(a), (e),
Dec. 22, 2017
, 131 Stat. 2111, 2113, provided that, applicable to amounts paid or incurred in taxable years beginning after Dec. 31, 2021
, with additional provision relating to change in method of accounting applicable in taxable years beginning after Dec. 31, 2021
, this section is amended to read as follows:§ 174. Amortization of research and experimental expenditures
(a) In general
In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—
(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and
(2) the taxpayer shall—
(A) charge such expenditures to capital account, and
(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.
(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.
(c) Special rules
(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.
(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).
(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.
(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.
See 2017 Amendment note below.
Amendments
2017—Pub. L. 115–97 amended section generally. Prior to amendment, section consisted of subsecs. (a) to (f) relating to treatment of research and experimental expenditures as expenses, amortization of certain research and experimental expenditures, expenditure for the acquisition or improvement of land or property, ore and mineral deposit exploration expenditures, limitation to reasonable research expenditures eligible, and cross references, respectively.
2014—Subsec. (a)(2)(A). Pub. L. 113–295, § 221(a)(31), amended subpar. (A) generally. Prior to amendment, text read as follows: “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, § 221(a)(32), struck out “beginning after
December 31, 1953
” after “for any taxable year”.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, § 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, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
Subsec. (a)(2)(A)(i). Pub. L. 94–455, § 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, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
Effective Date of 2017 Amendment; Applicability of Change in Method of Accounting
Pub. L. 115–97, title I, § 13206(b),
Dec. 22, 2017
, 131 Stat. 2112, provided that:
“The amendments made by subsection (a) [amending this section] 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.”
Amendment by Pub. L. 115–97 applicable to amounts paid or incurred in taxable years beginning after
Dec. 31, 2021
, see section 13206(e) of Pub. L. 115–97, set out as a note under section 41 of this title.Effective Date of 2014 Amendment
Amendment by Pub. L. 113–295 effective
Dec. 19, 2014
, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.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, § 223(a),
Aug. 13, 1981
, 95 Stat. 249, as amended by Pub. L. 99–514, § 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.”