In 2017, Red incurred the following expenses in connection with development and
ID: 2409249 • Letter: I
Question
In 2017, Red incurred the following expenses in connection with development and launch of a new product: Salaries Materials Advertising Depreciation on machine $100,000 S43,000 $5,000 $9,000 Red expects to begin selling production in 2018 so he elects to amortize research and experimental expenditures over 60 months. Assuming no additional R&E; expenditures, what is the amount of the deduction for R&E; expenditures in 2019 with a full year of sales? A) $31,400. B $30,400 C) $28,600. D) $21,800. E) None of the above. True or False: If Red had preferred, he could have elected to expense all research and experimental expenditures in the year they were incurred 10 of 13Explanation / Answer
Part A)
Out of the expenditures listed in the question, the following items will qualify for treatment as research expenditures:
Total Qualifying Research Expenditures = Salaries + Materials + Depreciation on Machine
Using the values provided in the question in the above formula, we get,
Total Qualifying Research Expenditures = 100,000 + 43,000 + 9,000 = $152,000
Now, we can calculate the amount of deduction for R&D expenditures in 2019 with full year of sales as below:
Deduction for R&D expenditures in 2019 = Total Qualifying Research Expenditures/60 Months*12 = 152,000/60*12 = $30,400 (which is Option B)
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Notes:
Advertising is not a qualifying R&D expenditure.
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Part B)
The statement is "True".
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Explanation:
As per applicable IRS rules, the entire amount of qualifying research and development expenditure can be deducted in the year in which they are incurred as current business expenses. This election has to be made in the first year in which such R&D expenditures have been incurred. Therefore, the statement is correct.