The costs of research and experimentation are generally capital expenses. However, you can choose to deduct these costs as a current business expense.

For information on amortizing these costs, see Research and Experimental Costs in chapter 9.

Research and experimental costs defined. Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement.

The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another's patent are not research and experimental costs.

Product. The term "product" includes any of the following items.

• Formula.
• Invention.
• Patent.
• Pilot model.
• Process.
• Technique.
• Property similar to the items listed above.

It also includes products used by you in your trade or business or held for sale, lease, or license.

Costs not included. Research and experimental costs do not include expenses for any of the following activities.

• Advertising or promotions.
• Consumer surveys.
• Efficiency surveys.
• Management studies.
• Quality control testing.
• Research in connection with literary, historical, or similar projects.
• The acquisition of another's patent, model, production, or process.

When and how to choose. Generally, you can make the choice to deduct these costs only in the first year you incur research and experimental costs.

You choose to deduct research and experimental costs, rather than capitalize them, by deducting them on your tax return for the year in which you first incur research and experimental costs.

IF you . . .	THEN . . .
Deduct research and experimental costs as a current business expense,	Deduct all research and experimental costs for the year of choice and all later years.
Do not deduct research and experimental costs as a current business expense,	Amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research.

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