Expenditures by an advertising agency for investigative projects to develop new advertising concepts to be published in booklets issued to prospective clients are not research and experimental expenditures with­in the meaning of section 174 of the Code.

Rev. Rul. 71-363

Advice has been requested whether the expenditures described below are research and experimental expendi­tures within the meaning of section 174 of the Internal Revenue Code of 1954.


The taxpayer operated an advertis­ing agency and expended substantial amounts for investigative projects de­signed to enable the agency to develop new advertising concepts and aids for use in understanding the advertising and marketing problems of several dif­ferent types of industries and to pro­vide new and creative solutions to these problems. The product of this investi­gative activity was booklets that con­tained a statistical profile of the in­dustry investigated, as well as a descriptive text, a discussion of the advertising possibilities and various suggestions for improving the indus­try’s advertising performance or for solving particular advertising prob­lems. The booklets were used when the corporation solicited new accounts. All of the projects were unconnected with any particular client or clients.

Section 1.174-2(a)(1) of the In­come Tax Regulations provides that the term “research and experimental expenditures” means expenditures in­curred in connection with the tax­payer’s trade or business which represent research and development costs in the experimental or laboratory sense. The term includes, generally, all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property, and the improvement of already existing prop­erty of the type mentioned. The term does not include expenditures such as those for efficiency surveys, manage­ment studies, consumer surveys, ad­vertising, or promotions.

The investigative projects and the resultant booklets, in the instant case, are collections of sales promotion ma­terial used to obtain new accounts by presenting new marketing and adver­tising ideas to prospective clients. Expenditures for such purposes are re­lated to advertising and promotion rather than to the development or im­provement of property in the experi­mental or laboratory sense.

Accordingly, the expenditures in the instant case are not research and ex­perimental expenditures within the meaning of section 174 of the Code. Such expenditures are, in the absence of evidence indicating that the book­lets have a useful life of more than one year, deductible under section 162 of the Code.

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