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(b) - Definition of Research and Experimental Expenditures

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(1) In General.
(A) The term "research or experimental
					 expenditures," as used in Sections
					 24365 to
					 24368, inclusive, means
					 expenditures incurred in connection with the taxpayer's trade or business which
					 represent research and development costs in the experimental or laboratory
					 sense. The term includes generally all such costs incident to the development
					 of an experimental or pilot model, a plant process, a product, a formula, an
					 invention, or similar property, and the improvement of already existing
					 property of the type mentioned. The term does not include expenditures such as
					 those for the ordinary testing or inspection of materials or products for
					 quality control or those for efficiency surveys, management studies, consumer
					 surveys, advertising, or promotions. However, the term includes the costs of
					 obtaining a patent, such as attorneys' fees expended in making and perfecting a
					 patent application. On the other hand, the term does not include the costs of
					 acquiring another's patent, model, production or process, nor does it include
					 expenditures paid or incurred for research in connection with literary,
					 historical, or similar projects.
(B) The provisions of this regulation apply
					 not only to costs paid or incurred by the taxpayer for research or
					 experimentation undertaken directly by it but also to expenditures paid or
					 incurred for research or experimentation carried on in its behalf by another
					 person or organization (such as a research institute, foundation, engineering
					 company, or similar contract). However, any expenditures for research or
					 experimentation carried on in the taxpayer's behalf by another person are not
					 expenditures to which Sections
					 24365 to
					 24368, inclusive, relate, to the
					 extent that they represent expenditures for the acquisition or improvement of
					 land or depreciable property, used in connection with the research or
					 experimentation, to which the taxpayer acquires rights of ownership.
(C) The application of paragraph (B) of this
					 subsection may be illustrated by the following examples:
EXAMPLE (1).
A Corporation engages B, to undertake research and
						experimental work in order to create a particular product. B will be paid
						annually a fixed sum plus an amount equivalent to his actual expenditures. In
						1961, A pays to B in respect of the project the sum of $150,000 of which
						$25,000 represents an addition to B's laboratory and the balance represents
						charges for research and experimentation on the project. It is agreed between
						the parties that A will absorb the entire cost of this addition to B's
						laboratory which will be retained by B. A may treat the entire $150,000 as
						expenditures under Sections
						24365 to
						24368, inclusive.
EXAMPLE (2).
X Corporation, a manufacturer of explosives, contracts
						with the Y research organization to attempt through research and
						experimentation the creation of a new process for making certain explosives.
						Because of the danger involved in such an undertaking, Y is compelled to
						acquire an isolated tract of land on which to conduct the research and
						experimentation. It is agreed that upon completion of the project Y will
						transfer this tract, including any improvements thereon, to X. Sections
						24365 to
						24368, inclusive, do not apply to
						the amount paid to Y representing the costs of the tract of land and
						improvements.