Rev. Rul. 58-78, 1958-1 C.B. 148

Research and experimental expenditures which are otherwise properly deductible currently for Federal income tax purposes, under section 174(a) of the Internal Revenue Code of 1954, may be so deducted regardless of the manner in which such expenditures are recorded by the taxpayer on its books and financial statements.

Rev. Rul. 58-78

Advice has been requested as to the deductibility, under section 174(a) of the Internal Revenue Code of 1954, of research and experimental expenditures which are reflected on corporate books and financial statements as capital account charges or deferred expenses.


The taxpayer is a manufacturing company and keeps its books on the accrual method. During the taxable year, certain research and experimental expenditures were recorded on its books as capital account charges or deferred expenses to be amortized over future production related to such charges. Research and experimental expenditures had not been paid or incurred by the corporation in any prior year and no election had been made as to the treatment to be afforded these expenditures for Federal income tax purposes. The taxpayer now proposes to deduct these expenditures from gross income, for Federal income tax purposes, in the year in which incurred, as provided in section 174(a) of the Code, but to continue to reflect such expenditures on its books and in its financial statements as capital account charges or deferred expenses.

Section 174 of the Code, 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.

* * * * * * * * * *

(3) SCOPE.-The method adopted under this subsection shall apply to all expenditures described in paragraph (1). * * *

Section 1.174-3(b) of the Income Tax Regulations, pertaining to the adoption and change of the method of accounting for research and experimental expenditures provided for in section 174(a), provides that the consent of the Commissioner is not required if the taxpayer adopts the method for the first taxable year in which he pays or incurs research or experimental expenditures.

The taxpayer, having complied with the requirements of the Code and Income Tax Regulations with regard to research and experimental expenditures, may use its discretion in accounting for such expenditures for its own record keeping purposes. Section 1.446-1(a)(1) of the Income Tax Regulations, pertaining to methods of accounting, provides, in effect, that where a special method of accounting may be used for special items such as research and experimental expenditures, such method does not have to be consistent with the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. Furthermore, section 1.446-1(a)(4) of the regulations provides that the taxpayer must maintain such accounting records as will enable him to file a correct return, and such data as may be necessary to support his return as, for example, a reconciliation of any differences between such books and his return.

Therefore, it is held that research and experimental expenditures which are otherwise properly deductible currently for Federal income tax purposes, under section 174(a) of the Code, may be so deducted regardless of the manner in which such expenditures are recorded by the taxpayer on its books and in its financial statements.