Best Practices: What are “incidental” costs? How broadly can you define them?

There have been a lot of questions around Section 174, lately.

For tax years beginning after December 31, 2021, taxpayers are required to capitalize and amortize all research and experimental (R&E) expenditures.

What exactly does this mean?

  • Five–year amortization period for U.S.-based research, beginning with the midpoint of the tax year in which the expenditure is paid or incurred (i.e., recovery is spread over 6 taxable years. Expenditures incurred in connection with the taxpayer’s trade or business represent research and development costs in the experimental or laboratory sense.
  • There is a 15-year amortization period for foreign-based research (i.e., recovery is spread over 16 taxable years).
  • Software development costs are governed by new mandatory rule.
  • No deduction is allowed upon disposition, retirement, or abandonment.

Our colleagues and clients are asking really good questions about Section 174. We figured we’d share the best ones with you here.

What are “incidental” costs? How broadly can you define them?

When determining the eligible costs for research and development (“R&D”) activities under Section 174, it’s important to understand the concept of ‘incidental’ costs.

These are expenses that are related to the R&D efforts but may not be directly attributable to a specific activity or project.

In this FAQ, we delve into the definition and scope of incidental costs.

Incident to:

  • Employee benefits (e.g., self-insured medical, payroll taxes)
  • Overhead (e.g., utilities, building depreciation, building rent)
  • Patent and regulatory costs incident to product development
  • Stock-based compensation

Not incident to:

  • G&A
  • Business operations/maintenance

Please contact the MASSIE team if you want to discuss this topic further or require assistance with your calculations.

Disclaimer: The information above is subject to change, as the IRS may implement additional guidelines in the future. The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation.

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