An IRC Section 174 expense is one that’s directly connected to the taxpayer’s trade or business and represents an R&D cost in the experimental or laboratory sense. Examples include:
· Wages paid to employees who were directly involved in R&D activities and the individuals who directly supervised or supported their work
· Supplies and raw materials used in design, fabrication or testing that were not capitalized or depreciated
· Work performed by a third party as part of a contract, in which the business assumed the brunt of the economic risk, regardless of the outcome
It’s important to note that even if an R&D cost passes the Section 174 test, it must still meet IRC Section 41 requirements to be considered a qualified research expense (QRE).