U.S. Treasury Proposal Would Allow Research Tax Credits for Prototypes

Under a new set of proposed rules issued by the U.S. Department of the Treasury, companies will be able to claim the federal research and experimentation (R&E) tax credit on eligible expenditures regardless of any subsequent actions taken by businesses with the purchases. The change would allow businesses to claim the credit on research expenses used to create prototypes, pilot models and process improvements.

Previously, there was some debate about whether or not the sale or a prototype or product resulting for qualifying research expenditures would preclude deductions or amortization of those expenses. The proposed rules clarify that if the expenditure would otherwise qualify for the R&E credits, then businesses may claim them for any kind of tangible property, regardless of the success, failure, sale or use of the product.

The regulations also clarify the Treasury definition of a pilot model, one of the acceptable uses of R&E eligible expenditures. A pilot model is described as “any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during the development or improvement of the product."

In the announcement of the new rules, Treasury notes that the changes should reduce uncertainty on the part of research-oriented business, providing an additional incentive to innovate. Though the new regulations are still pending finalization, Treasury has instructed taxpayers that they may rely on the clarified rules in the interim. Read the Treasury announcement...