26 U.S.C. § 174 — Amortization of research and experimental

Page 891 TITLE 26—INTERNAL REVENUE CODE § 174 duction shall not be allowed with respect to the portion of such expenditures as, under regula- tions prescribed by the Secretary, is chargeable to capital account if the taxpayer elects, in ac- cordance with such regulations, to treat such portion as so chargeable. Such election, if made, must be for the total amount of such portion of the expenditures which is so chargeable to cap- ital account, and shall be binding for all subse- quent taxable years unless, upon application by the taxpayer, the Secretary permits a revoca- tion of such election subject to such conditions as he deems necessary. (b) Cross reference For election of 3-year amortization of expendi- tures allowable as a deduction under subsection (a), see section 59(e). (Aug. 16, 1954, ch. 736, 68A Stat. 65; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 97–248, title II, § 201(d)(9)(A), for- merly § 201(c)(9)(A), Sept. 3, 1982, 96 Stat. 420, re- numbered § 201(d)(9)(A), Pub. L. 97–448, title III, § 306(a)(1)(A)(i), Jan. 12, 1983, 96 Stat. 2400; Pub. L. 98–369, div. A, title VII, § 711(a)(3)(C), July 18, 1984, 98 Stat. 942; Pub. L. 99–514, title VII, § 701(e)(4)(D), Oct. 22, 1986, 100 Stat. 2343; Pub. L. 100–647, title I, § 1007(g)(5), Nov. 10, 1988, 102 Stat. 3435.) Editorial Notes AMENDMENTS 1988—Subsec. (b). Pub. L. 100–647 substituted ‘‘section 59(e)’’ for ‘‘section 59(d)’’. 1986—Subsec. (b). Pub. L. 99–514 substituted ‘‘section 59(d)’’ for ‘‘section 58(i)’’. 1984—Subsec. (b). Pub. L. 98–369 substituted ‘‘3-year’’ for ‘‘10-year’’. 1982—Pub. L. 97–248, § 201(d)(9)(A), designated existing provisions as subsec. (a), added subsec. (a) heading, and added subsec. (b). 1976—Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’ in two places. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain excep- tions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an Effective Date note under section 55 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 effective as if included in the provision of the Tax Equity and Fiscal Responsi- bility Act of 1982, Pub. L. 97–248, to which such amend- ment relates, see section 715 of Pub. L. 98–369, set out as a note under section 31 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–248 applicable to taxable years beginning after Dec. 31, 1982, see section 201(e)(1) of Pub. L. 97–248, set out as a note under section 5 of this title. APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99–514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES For applicability of amendment by Pub. L. 99–514 not- withstanding any treaty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amendment by title I of Pub. L. 100–647 be treated as if it had been included in the pro- vision of Pub. L. 99–514 to which such amendment re- lates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. § 174. Amortization of research and experimental expenditures (a) In general In the case of a taxpayer’s specified research or experimental expenditures for any taxable year— (1) except as provided in paragraph (2), no deduction shall be allowed for such expendi- tures, and (2) the taxpayer shall— (A) charge such expenditures to capital ac- count, and (B) be allowed an amortization deduction of such expenditures ratably over the 5-year period (15-year period in the case of any specified research or experimental expendi- tures which are attributable to foreign re- search (within the meaning of section 41(d)(4)(F))) beginning with the midpoint of the taxable year in which such expenditures are paid or incurred. (b) Specified research or experimental expendi- tures For purposes of this section, the term ‘‘speci- fied research or experimental expenditures’’ means, with respect to any taxable year, re- search or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business. (c) Special rules (1) Land and other property This section shall not apply to any expendi- ture for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the re- search or experimentation and of a character which is subject to the allowance under sec- tion 167 (relating to allowance for deprecia- tion, etc.) or section 611 (relating to allowance for depletion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as ex- penditures. (2) Exploration expenditures This section shall not apply to any expendi- ture paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas). (3) Software development For purposes of this section, any amount paid or incurred in connection with the devel- opment of any software shall be treated as a research or experimental expenditure. Page 892 TITLE 26—INTERNAL REVENUE CODE § 174 (d) Treatment upon disposition, retirement, or abandonment If any property with respect to which specified research or experimental expenditures are paid or incurred is disposed, retired, or abandoned during the period during which such expendi- tures are allowed as an amortization deduction under this section, no deduction shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures. (Aug. 16, 1954, ch. 736, 68A Stat. 66; Pub. L. 94–455, title XIX, §§ 1901(a)(30), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1769, 1834; Pub. L. 97–248, title II, § 201(d)(9)(B) formerly § 201(c)(9)(B), Sept. 3, 1982, 96 Stat. 420, renumbered § 201(d)(9)(B), Pub. L. 97–448, title III, § 306(a)(1)(A)(i), Jan. 12, 1983, 96 Stat. 2400; amended Pub. L. 99–514, title VII, § 701(e)(4)(D), Oct. 22, 1986, 100 Stat. 2343; Pub. L. 100–647, title I, § 1007(g)(5), Nov. 10, 1988, 102 Stat. 3435; Pub. L. 101–239, title VII, § 7110(d), Dec. 19, 1989, 103 Stat. 2325; Pub. L. 113–295, div. A, title II, § 221(a)(31), (32), Dec. 19, 2014, 128 Stat. 4042; Pub. L. 115–97, title I, § 13206(a), Dec. 22, 2017, 131 Stat. 2111.) Editorial Notes AMENDMENTS 2017—Pub. L. 115–97 amended section generally. Prior to amendment, section consisted of subsecs. (a) to (f) relating to treatment of research and experimental ex- penditures as expenses, amortization of certain re- search and experimental expenditures, expenditure for the acquisition or improvement of land or property, ore and mineral deposit exploration expenditures, limita- tion to reasonable research expenditures eligible, and cross references, respectively. 2014—Subsec. (a)(2)(A). Pub. L. 113–295, § 221(a)(31), amended subpar. (A) generally. Prior to amendment, text read as follows: ‘‘A taxpayer may, without the consent of the Secretary, adopt the method provided in this subsection for his first taxable year— ‘‘(i) which begins after December 31, 1953, and ends after August 16, 1954, and ‘‘(ii) for which expenditures described in paragraph (1) are paid or incurred.’’ Subsec. (b)(2). Pub. L. 113–295, § 221(a)(32), struck out ‘‘beginning after December 31, 1953’’ after ‘‘for any tax- able year’’. 1989—Subsecs. (e), (f). Pub. L. 101–239 added subsec. (e) and redesignated former subsec. (e) as (f). 1988—Subsec. (e)(2). Pub. L. 100–647 substituted ‘‘sec- tion 59(e)’’ for ‘‘section 59(d)’’. 1986—Subsec. (e)(2). Pub. L. 99–514 substituted ‘‘sec- tion 59(d)’’ for ‘‘section 58(i)’’. 1982—Subsec. (e). Pub. L. 97–248, § 201(d)(9)(B), sub- stituted ‘‘Cross references’’ for ‘‘Cross reference’’ in heading, designated existing provisions as par. (1), and added par. (2). 1976—Subsec. (a)(2)(A). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Subsec. (a)(2)(A)(i). Pub. L. 94–455, § 1901(a)(30), sub- stituted ‘‘August 16, 1954’’ for ‘‘the date on which this title is enacted’’ after ‘‘ends after’’. Subsecs. (a)(3), (b)(1), (2). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Sec- retary’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT; APPLICABILITY OF CHANGE IN METHOD OF ACCOUNTING Pub. L. 115–97, title I, § 13206(b), Dec. 22, 2017, 131 Stat. 2112, provided that: ‘‘The amendments made by sub- section (a) [amending this section] shall be treated as a change in method of accounting for purposes of sec- tion 481 of the Internal Revenue Code of 1986 and— ‘‘(1) such change shall be treated as initiated by the taxpayer, ‘‘(2) such change shall be treated as made with the consent of the Secretary, and ‘‘(3) such change shall be applied only on a cut-off basis for any research or experimental expenditures paid or incurred in taxable years beginning after De- cember 31, 2021, and no adjustments under section 481(a) shall be made.’’ Amendment by Pub. L. 115–97 applicable to amounts paid or incurred in taxable years beginning after Dec. 31, 2021, see section 13206(e) of Pub. L. 115–97, set out as a note under section 41 of this title. EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 applicable to taxable years beginning after Dec. 31, 1989, see section 7110(e) of Pub. L. 101–239, set out as a note under section 41 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain excep- tions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an Effective Date note under section 55 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–248 applicable to taxable years beginning after Dec. 31, 1982, see section 201(e)(1) of Pub. L. 97–248, set out as a note under section 5 of this title. APPLICABILITY OF CERTAIN AMENDMENTS BY PUB. L. 99–514 IN RELATION TO TREATY OBLIGATIONS OF UNITED STATES For applicability of amendment by Pub. L. 99–514 not- withstanding any treaty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amendment by title I of Pub. L. 100–647 be treated as if it had been included in the pro- vision of Pub. L. 99–514 to which such amendment re- lates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title. ALLOCATION OR APPORTIONMENT TO SOURCES WITHIN UNITED STATES OF RESEARCH AND EXPERIMENTAL EXPENDITURES PAID OR INCURRED FOR RESEARCH AC- TIVITIES CONDUCTED IN UNITED STATES; 2-YEAR PRO- GRAM Pub. L. 97–34, title II, § 223(a), Aug. 13, 1981, 95 Stat. 249, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘In the case of the taxpayer’s first 2 taxable years beginning within 2 years after the date of the enactment of this Act [Aug. 13, 1981], all re- search and experimental expenditures (within the meaning of section 174 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) which are paid or incurred in such year for research activities conducted in the United States shall be allocated or apportioned to sources within the United States.’’ Page 893 TITLE 26—INTERNAL REVENUE CODE § 175 § 175. Soil and water conservation expenditures; endangered species recovery expenditures (a) In general A taxpayer engaged in the business of farming may treat expenditures which are paid or in- curred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, or for endan- gered species recovery, as expenses which are not chargeable to capital account. The expendi- tures so treated shall be allowed as a deduction. (b) Limitation The amount deductible under subsection (a) for any taxable year shall not exceed 25 percent of the gross income derived from farming during the taxable year. If for any taxable year the total of the expenditures treated as expenses which are not chargeable to capital account ex- ceeds 25 percent of the gross income derived from farming during the taxable year, such ex- cess shall be deductible for succeeding taxable years in order of time; but the amount deduct- ible under this section for any one such suc- ceeding taxable year (including the expenditures actually paid or incurred during the taxable year) shall not exceed 25 percent of the gross in- come derived from farming during the taxable year. (c) Definitions For purposes of subsection (a)— (1) The term ‘‘expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in re- spect of land used in farming, or for the pre- vention of erosion of land used in farming, or for endangered species recovery’’ means ex- penditures paid or incurred for the treatment or moving of earth, including (but not limited to) leveling, grading and terracing, contour furrowing, the construction, control, and pro- tection of diversion channels, drainage ditches, earthen dams, watercourses, outlets, and ponds, the eradication of brush, and the planting of windbreaks. Such term shall in- clude expenditures paid or incurred for the purpose of achieving site-specific management actions recommended in recovery plans ap- proved pursuant to the Endangered Species Act of 1973. Such term does not include— (A) the purchase, construction, installa- tion, or improvement of structures, appli- ances, or facilities which are of a character which is subject to the allowance for depre- ciation provided in section 167, or (B) any amount paid or incurred which is allowable as a deduction without regard to this section. Notwithstanding the preceding sentences, such term also includes any amount, not otherwise allowable as a deduction, paid or incurred to satisfy any part of an assessment levied by a soil or water conservation or drainage district to defray expenditures made by such district (i) which, if paid or incurred by the taxpayer, would without regard to this sentence con- stitute expenditures deductible under this sec- tion, or (ii) for property of a character subject to the allowance for depreciation provided in section 167 and used in the soil or water con- servation or drainage district’s business as such (to the extent that the taxpayer’s share of the assessment levied on the members of the district for such property does not exceed 10 percent of such assessment). (2) The term ‘‘land used in farming’’ means land used (before or simultaneously with the expenditures described in paragraph (1)) by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. (3) ADDITIONAL LIMITATIONS.— (A) EXPENDITURES MUST BE CONSISTENT WITH SOIL CONSERVATION PLAN OR ENDAN- GERED SPECIES RECOVERY PLAN.—Notwith- standing any other provision of this section, subsection (a) shall not apply to any expend- itures unless such expenditures are con- sistent with— (i) the plan (if any) approved by the Soil Conservation Service of the Department of Agriculture or the recovery plan approved pursuant to the Endangered Species Act of 1973 for the area in which the land is lo- cated, or (ii) if there is no plan described in clause (i), any soil conservation plan of a com- parable State agency. (B) CERTAIN WETLAND, ETC., ACTIVITIES NOT QUALIFIED.—Subsection (a) shall not apply to any expenditures in connection with the draining or filling of wetlands or land prepa- ration for center pivot irrigation systems. (d) When method may be adopted (1) Without consent A taxpayer may, without the consent of the Secretary, adopt the method provided in this section for the taxpayer’s first taxable year for which expenditures described in subsection (a) are paid or incurred. (2) With consent A taxpayer may, with the consent of the Secretary, adopt at any time the method pro- vided in this section. (e) Scope The method adopted under this section shall apply to all expenditures described in subsection (a). The method adopted shall be adhered to in computing taxable income for the taxable year and for all subsequent taxable years unless, with the approval of the Secretary, a change to a dif- ferent method is authorized with respect to part or all of such expenditures. (f) Rules applicable to assessments for depre- ciable property (1) Amounts treated as paid or incurred over 9- year period In the case of an assessment levied to defray expenditures for property described in clause (ii) of the last sentence of subsection (c)(1), if the amount of such assessment paid or in- curred by the taxpayer during the taxable year (determined without the application of this paragraph) is in excess of an amount equal to 10 percent of the aggregate amounts which