Professional Tax Research Solutions from the Founder of Kleinrock. tax research
Parkers Tax Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
CPA software
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

Regs Confirm Subsequent Events Are Not Relevant to Deductibility of Research and Experimental Expenses. (Parker Tax Publishing August 12, 2014)

Final regulations on the deductibility of research and experimental expenses confirm that the ultimate success, failure, sale, or other use of the research or property resulting from the research or experimentation is not relevant in determining the deductibility of such expenses. T.D. 9680 (7/21/14).

In 1957, the IRS issued regulations under Code Sec. 174. Reg. Sec. 1.174-2(b)(1) provided that under Code Sec. 174, expenditures for the acquisition or improvement of property subject to an allowance for depreciation or depletion were not deductible under Code Sec. 174 in the year of the acquisition or improvement. However, the regulations treated depreciation deductions as Code Sec. 174 expenditures to the extent that the property to which the allowances related was used in connection with research and experimentation. The 1957 regulations further provided, in Reg. Sec. 1.174-2(b)(4), that expenditures resulting in depreciable property to be used in the taxpayer's trade or business were still deductible to the extent of amounts expended for research or experimentation. The rules in Reg. Sec. 1.174-2(b)(1) and Reg. Sec. 1.174-2(b)(4) are referred to as the "Depreciable Property Rule." Until a proposed change in 2013, the Depreciable Property Rule remained unchanged from the rule's adoption in the 1957 regulations.

In 2013, the IRS issued proposed regulations reflecting the following revisions to the research and experimental expense regulations. First, the proposed regulations amended Sec. 1.174-2(b)(4) to provide that the "Depreciable Property Rule" was an application of the general definition of research or experimental expenditures and should not be applied to exclude otherwise eligible expenditures from being deducted. Second, to counter an interpretation that Code Sec. 174 eligibility could be reversed by a subsequent event, the proposed regulations provided that the ultimate success, failure, sale, or other use of the research or property resulting from research or experimentation was not relevant to determining eligibility. Third, the proposed regulations defined the term "pilot model" as any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during the development or improvement of the product. The term included a fully-functional representation or model of the product or a component of a product. Fourth, the proposed regulations clarified the general rule that the costs of producing a product after uncertainty concerning the development or improvement of a product is eliminated are not eligible under Code Sec. 174 because these costs are not for research or experimentation. Finally, the proposed regulations provided a shrinking-back rule, similar to the rule provided in Reg. Sec. 1.41-4(b)(2), to address situations in which the requirements of Reg. Sec. 1.174-2(a)(1) are met with respect to only a component part of a larger product and not with respect to the overall product itself.

On July 21, the IRS finalized these regulations with very few changes. With respect to pilot models, the final regulations modify Example 5 to clarify that it is not necessary for each pilot model to be tested for a discrete purpose for the costs of multiple pilot models to qualify as research and experimental expenditures. Another change dealt with the shrinking-back rule,because some practitioners requested that this rule be eliminated as it was peculiar to Code Sec. 41 and served no purpose in Code Sec. 174. In response, the IRS clarified that the shrinking-back rule is intended to ensure that Code Sec. 174 eligibility is preserved in instances in which a basic design specification of the product may be established, but there is uncertainty with respect to certain components of the product, even if uncertainty arises after production of the product has begun. While the substance of the shrinking-back rule was retained in the final regulations, in response to practitioner concerns and to avoid any unintended confusion with the shrinking-back rule of Reg. Sec. 1.41-4(b)(2), the term "shrinking-back rule" was deleted from Reg. Sec. 1.174-2(a)(5).

The final regulations apply to tax years ending on or after July 21, 2014. However, taxpayers have the option of applying the final regulations to tax years for which the statute of limitations has not expired.

For a discussion of the rules for deducting research and experimental expenditures, see Parker Tax ¶95,500. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance