The deduction of research and experimental expenditures in an income tax return filed for the first taxable year beginning after December 31, 1953, and ending after August 16, 1954, although such deduction is not separately shown as such in the return, effectuates the adoption of the expense method provided by section 174(a) of the Internal Revenue Code of 1954.
Rev. Rul. 58-356
Advice has been requested whether a taxpayer has adopted the expense method of treating research and experimental expenditures where a deduction therefor has been claimed in his income tax return, but without showing such deduction separately.
The taxpayer incurred and paid research and experimental expenditures, of the type defined in section 1.174-2 of the Income Tax Regulations, for the first time during the year 1954. These expenditures were deducted in its income tax return filed for the calendar year 1954 by their inclusion in various expense accounts such as salaries and supplies. No mention was made of research and experimental expenses in the return filed.
Section 174 of the Internal Revenue Code of 1954, relating to research and experimental expenditures, provides, in part, as follows:
(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 or his delegate, adopt the method provided in this subsection for his first taxable year-
(i) which begins after December 31, 1953, and ends after the date on which this title is enacted, and
(ii) for which expenditures described in paragraph (1) are paid or incurred.
(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 or his delegate, a change to a different method is authorized with respect to part or all of such expenditures.
Section 1.174-3(b) (1) of the Income Tax Regulations provides that the taxpayer may adopt the expense method of treating research and experimental expenditures by claiming in his income tax return for his first taxable year, as described in section 174(a)(2)(A) of the Code, a deduction for such expenditures.
Inasmuch as there are no specific requirements as to the captions or headings under which these expenditures should be reflected in the return, and no statement of election is required, the taxpayer, in the instant case, has complied with the requirements of the Code and Income Tax Regulations to effectuate the adoption of the method of treating these expenditures as expenses.
Accordingly, the deduction of research and experimental expenditures in an income tax return filed for the first taxable year beginning after December 31, 1953, and ending after August 16, 1954, although such deduction is not separately shown as such in the return, effectuates the adoption of the expense method provided by section 174(a) of the Code. The adoption of the expense method in such a manner is a binding election within the scope of section 174(a)(3) of the Code.
Notwithstanding this conclusion, it is the view of the Internal Revenue Service that, in order to avoid any question as to taxpayers’ intentions with respect to their adoption and use of the expense method, it is preferable that the total amount of the deduction for research or experimental expenditures be shown on the taxpayers’ returns as a separate item of expense. In any event, the records of taxpayers claiming deductions for research or experimental expenditures must be maintained in sufficient detail to permit verification of the total of the amount of such expenditures deducted upon examination of their returns. See sections 1.174-3(b)(3)(v) and 1.174-4(b)(1)(vi) of the regulations which indicate the accounting segregation which taxpayers are required to make on their books and records with respect to research or experimental expenditures treated in accordance with the provisions of section 174 of the Code.