California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 7 - Net Income › Article 1 - Deductions › Section 24365-24368(d) - Treatment as Deferred Expenses

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
[FN*]
(1) In
					 General.
(A) If a taxpayer has not adopted
					 the method provided in Section
					 24365 of treating research or
					 experimental expenditures paid or incurred by it in connection with its trade
					 or business as currently deductible expenses, it may, for any income year
					 beginning after December 31, 1960, elect to treat such expenditures as deferred
					 expenses under Section
					 24366, subject to the limitations
					 of paragraph (B) of this subsection. If a taxpayer has adopted the method of
					 treating such expenditures as expenses under Section
					 24365, it may not elect to defer
					 and amortize any such expenditures unless permission to do so is granted under
					 Section 24365(c). See
					 subsection (2) of this regulation.
(B) The election to treat research or
					 experimental expenditures as deferred expenses under Section
					 24366 applies only to those
					 expenditures which are chargeable to capital account but which are not
					 chargeable to property of a character subject to an allowance for depreciation
					 or depletion under Sections
					 24349 to
					 24354, inclusive, or Sections
					 24831 to
					 24835, inclusive, respectively.
					 Thus, the election under Section
					 24366 applies only if the property
					 resulting from the research or experimental expenditures has no determinable
					 useful life. If the property resulting from the expenditures has a determinable
					 useful life, Section
					 24366 is not applicable, and the
					 capitalized expenditures must be amortized or depreciated over the determinable
					 useful life. Amounts treated as deferred expenses are properly chargeable to
					 capital account for purposes of Section
					 24916(a),
					 relating to adjustments to basis of property. See Section
					 24916(g). See
					 Section 24367 and subsection (2)(A) of
					 Reg. 24365-24368(b) for treatment of expenditures for the acquisition or
					 improvement of land or of depreciable or depletable property to be used in
					 connection with the research or experimentation.
(C) Expenditures which are treated as
					 deferred expenses under Section
					 24366 are allowable as a deduction
					 ratably over a period of not less than 60 consecutive months beginning with the
					 month in which the taxpayer first realizes benefits from the expenditures. The
					 length of the period shall be selected by the taxpayer at the time it makes the
					 election to defer the expenditures. If a taxpayer has two or more separate
					 projects, it may select a different amortization period for each project. In
					 the absence of a showing to the contrary, the taxpayer will be deemed to have
					 begun to realize benefits from the deferred expenditures in the month in which
					 the taxpayer first puts the process, formula, invention, or similar property to
					 which the expenditures relate to an income-producing use. See Section
					 24916(g) for
					 adjustments to basis of property for amounts allowed as deductions under
					 Section 24366 and this regulation. See
					 Section 24347 and the regulations
					 thereunder for rules relating to the treatment of losses resulting from
					 abandonment.
(D) If expenditures
					 which the taxpayer has elected to defer and deduct ratably over a period of
					 time in accordance with Section
					 24366 result in the development of
					 depreciable property, deductions for the unrecovered expenditures, beginning
					 with the time the asset becomes depreciable in character, shall be determined
					 under Sections
					 24349 to
					 24354, inclusive (relating to
					 depreciation) and the regulations thereunder. For example, for the income year
					 1961, A Corporation, who reports its income on the basis of a calendar year,
					 elects to defer and deduct ratably over a period of 60 months research and
					 experimental expenditures made in connection with a particular project. In
					 1963, the total of the deferred expenditures amounts to $60,000. At that time,
					 A has developed a process which it seeks to patent. On July 1, 1963, A first
					 realized benefits from the marketing of products resulting from this process.
					 Therefore, the expenditures deferred are deductible ratably over the 60-month
					 period beginning with July 1, 1963 (when A first realized benefits from the
					 project). In its return for the year 1963, A deducted $6,000; in 1964, A
					 deducted $12,000 ($1,000 per month). On July 1, 1965, a patent protecting its
					 process is obtained by A. In its return for 1965, A is entitled to a deduction
					 of $6,000, representing the amortizable portion of the deferred expenses
					 attributable to the period prior to July 1, 1965. The balance of the
					 unrecovered expenditures ($60,000 minus $24,000, or $36,000) is to be recovered
					 as a depreciation deduction over the life of the patent commencing with July 1,
					 1965. Thus, one-half of the annual depreciation deduction based upon the useful
					 life of the patent is also deductible for 1965 (from July 1 to December
					 31.)
(E) The election shall be
					 applicable to all research and experimental expenditures paid or incurred by
					 the taxpayer or, if so limited by the taxpayer's election, to all such
					 expenditures with respect to the particular project, subject to the limitations
					 of paragraph (B) of this subsection. The election shall apply for the income
					 year for which the election is made and for all subsequent income years, unless
					 a change to a different treatment is authorized by the Franchise Tax Board
					 under Section
					 24366(b). See
					 subsection (2)(B)of this regulation. Likewise, the taxpayer shall adhere to the
					 amortization period selected at the time of the election unless a different
					 period of amortization with respect to a part or all of the expenditures is
					 similarly authorized. However, no change in method will be permitted with
					 respect to expenditures paid or incurred before the income year to which the
					 change is to apply. In no event will the taxpayer be permitted to treat part of
					 the expenditures with respect to a particular project as deferred expenses
					 under Section
					 24366 and to adopt a different
					 method of treating the balance of the expenditures relating to the same project
					 for the same income year. The election under this regulation shall not apply to
					 any expenditures paid or incurred before the income year for which the taxpayer
					 makes the election.