termining the proper basis of amorti- 

 zation would, however, be extremely 

 difficult and frequently impossible of 

 solution. If the tax law were very 

 narrowly interpreted, it is conceiv- 

 able, although not likely, that the 

 difficulty of determining a proper 

 basis for amortizing capitalized re- 

 search costs might make it impossible 

 for such costs ever to be deducted for 

 tax purposes. The Treasury regula- 

 tions now permit intangible assets to 

 be amortized only when the useful 

 life of the asset can be determined 

 with reasonable accuracy. 



Since a delay of several years ordi- 

 narily occurs before a tax return is 

 finally audited and closed by the Bu- 

 reau of Internal Revenue, the un- 

 certain status of the deductibility of 

 research and development expendi- 

 tures can involve very large sums of 

 money. Small firms making heavy 

 research expenditures, in particular, 

 are restricted by this uncertainty in 

 their commitments for fixed invest- 

 ments. 



2. Proper Accounting Treatment 

 of Research and Development 

 Costs 



No simple, universally applicable 

 principles can be laid down as to the 

 proper accounting treatment of re- 

 search and development costs. Some 

 research costs are clearly current ex- 

 penses: they either turn out to be 

 worthless or merely enable the tax- 

 payer to keep abreast of his com- 

 petitor. Other research expenditures 

 may improve the long-run position of 

 an enterprise, but the amount of the 

 expenditures properly allocable to a 

 given product, and the proper basis 

 of amortization of these expenditures, 

 may be almost impossible to deter- 

 mine. In a few cases such as, per- 

 haps, the development of a new 



model of an airplane, the capital 

 nature of the expenditure may be 

 fairly obvious, and it may be possible 

 to determine a reasonably satisfactory 

 basis for amortizing the expenditure. 

 Even in such instances, however, it is 

 frequently impossible to determine in 

 the year that a given expenditure is 

 made whether a valuable capital asset 

 will be developed. 



3. The Public Interest 



This report assumes that the stimu- 

 lation of research and development 

 work, especially by small enterprises, 

 is in the national interest. It there- 

 fore follows that the present tax un- 

 certainties of research expenditures 

 should be removed. The case for 

 taking this action is particularly 

 strong since, for the most part, all 

 that is needed is a specific legal sanc- 

 tion of the present Treasury practice. 



B. Recommendations for Legislative 

 Action 



Recommendation (1). — Deductibil- 

 ity of expenditures on research and 

 development (other than expendi- 

 tures for the acquisition of tangible 

 capital assets). The Internal Revenue 

 Code should be amended to give the 

 taxpayer in every taxable year an 

 option : 



(a) To deduct currently all expen- 

 ditures on scientific research and the 

 development of new products and 

 processes, other than expenditures for 

 the acquisition of tangible capital 

 assets; or 



(h) To capitalize such expendi- 

 tures as deferred charges and amor- 

 tize them according to a specified 

 plan that in the judgment of the tax- 

 payer is deemed reasonable; or 



(c) To deduct currently such part 

 of these expenditures as in the judg- 



111 



