Is Research and Development Capitalized or Expensed? VP R&D

Martindale-Hubbell® Client Review Ratings™ display reviews submitted by individuals who have either hired or consulted the lawyers or law firms. If both the R&D credit and tax deduction are claimed, the deduction is reduced by the amount of the credit.

Also, man-agement was reluctant to adopt accounting treatment that could result in an unexpected immediate write-off of R&D “assets” when deemed to have no future value. In 1974, the FASB issued Statement No. 2 which required that private research and development expenditures be currently expensed. The troublesome problem of whether to capitalize or to expense R&D costs was temporarily solved.

IFRIC 12 — Service Concession Arrangements

From the beginning, early tax court decisions and accounting literature supported research and development cost deferral; but scientists and economists supported immediate deduction for tax purposes as a means to stimulate research and development. Research and development is a long-term investment for most companies resulting in many years of revenue, cash flow, and profit, and, thus, should theoretically be capitalized as an asset, not expensed. Without the capitalization accounting for research and development of R&D spending, it is more challenging to compare companies in the same industry, as the timing of their research spending can have a big impact on their bottom line in a given year. If a company doesn’t capitalize research and development, its net income can be significantly higher or lower because of the timing of R&D spending. It’s important to note that net income doesn’t include the significant investments in R&D under its cash flow from investing activities.

It can be seen that the United States and other nations share the difficulty of accounting for R&D costs. Despite problems of implementation and lack of comparability of financial statements in some cases, other nations are more sophisticated in distinguishing between types and stages of R&D. These countries specify accounting treatment according to the type of R&D costs. Perhaps, U.S. accounting should consider adopting some of the approaches used in these countries. No specific treatment is authorized by present law for research and experimental expenditures.

Tax Credit for R&D Expenses

Accounting income is estimated by matching expenses and revenues over the appropriate time period with cost allocation being essential to the matching process. In a rapidly changing technology, however, the useful lives of capital assets become inordinately difficult to estimate. Therefore, cost allocation to determine annual profits becomes even more difficult, yet more important, given a rapidly changing technology.