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Stephen G.
Stephen G., Sr Income Tax Expert
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With respect to R&D expenses, it appears a company must

Customer Question

With respect to R&D expenses, it appears a company must elect to 1) expense currently, or 2) amortize over 5 years, or 3) write off over 10 years. If a company failed to file any elections, have they lost the ability to expense, amortize or write off these expenses in a later year without consent of the IRS? Can they still amend a tax return for 2013 and claim file an election pursuant to section(###) ###-####2 and still get the benefit of an missed election. OR, is there an easier and different method? If for any reason, the R&D was just completed in the current year and placed into service, does that open the door to allow them to make an election currently? If so, can they expense 100% now, or be required to amortize? It seems the election has to be made in the year the costs were "incurred" vs. "placed in service." Can you clarify the options and/or requirements so the costs are not lost.
Submitted: 8 months ago.
Category: Tax
Expert:  Stephen G. replied 8 months ago.

From the IRS:

"The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current business expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change."

So the default position is to capitalize the research cost unless you make an election to expense the costs. If you don't make an election to expense the costs in the current year you don't bind yourself to anything in any future year as you will continue to capitalize and amortize the costs until you elect to expense them, which then would be binding going forward unless you obtain permission to revert to capitalizing them.

Pursuant to IRC(###) ###-####2 allows an automatic extension of 6 months only.

Depending upon what it is you want to do & why you were unable or simply didn't do it, within the proscribed time for doing so, there are other possible options depending upon what election you are referring to. However, these aren't automatic & you need to have a good reason or plausible explanation, not simply that you didn't know you needed to deal with whatever it is you didn't do.

Expert:  Stephen G. replied 8 months ago.

You may find the material at the following link informative:

http://rsmus.com/what-we-do/services/tax/lead-tax/ten-research-and-development-tax-credit-myths-that-may-be-costin.html

Expert:  Stephen G. replied 8 months ago.

Here's a link to a short IRS explanation of the basic R & D Options & deals with "incurred". There isn't really a "placed in service" requirement for R & D as by definition these costs may never turn into anything that can be placed in service. It also confirms my comment about the 6 month automatic extension.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Amortization-of-RD-Expenditures

Steve G.

Customer: replied 8 months ago.
then I should amortize currently as if had been amortizing all along and if desired amend to pick up past lost amortization.
Expert:  Stephen G. replied 8 months ago.

Well, I don't know what the facts of your situation are, but that seems correct, if I understand what you have done. Are you saying that the R & D costs were capitalized and no tax deductions were taken?

What type of entity are we talking about here? A Sub-S or "C" Corporation, and LLC filing as ?, a Partnership or a Sole Proprietorship?

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