 Hello and welcome to the session in which we will discuss how to account for tax purposes for research and experimental expenditure, known in financial accounting as research and development. The first thing we're going to look at is the definition of what is considered research and experimental expenditure. The regulation defined research and experimental cost, costs that are related to development or enhancement of a product, which may include expense for creating experimental model, you're trying to create something new, you have a model, refining a manufacturing processes, formulating a new product, creating a new product, inventing something or similar property. And this definition also encompasses expenses incurred in obtaining a patent, including legal fees for preparing and finalizing a patent application. However, expenses that are not included are not considered part of research and experiment are routine material or product testing for quality control. Quality control means the product is already out there. Efficiency surveys, is it good or not? It's working management studies, consumer surveys, advertising or promotion. Just be careful in case you saw a multiple choice. Rules are not considered part of the research and experimental expenditure. Now we need to learn how to account for these for tax purposes, because you need to know how to account for R&D, which is research and experimental expenditure for GAP. And it's very important that you understand we have different rules, sometimes we have different rules between IRS and GAP, and this is an example of it. Now the rules for research and development between FAR and between GAP and IRS, they're getting a little bit similar, but they used to be quite different. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. There are three options for how to account for research and experimental expenditure. The first one is immediately expense in the year you pay or incur the expense. That was available prior to December 31st, 2021. So you're saying if it's no longer available, why are you telling me this? The reason I'm telling you this is because when you immediately expense those costs, this is similar. This is similar. I'm going to repeat this more than once. This is similar to GAP, but this option is no longer available. Simply put, if for tax purposes you expense it, for GAP you expense the items, you expense research and development costs, you have no differences to account for. On schedule M1, you have no deferred tax asset, deferred tax liabilities. Also, the expenses incurred, you can defer them and amortize them. That's option two. And option three is simply capitalize them. Capitalize them means treat them as an asset. If option three is undertaking, which is capitalization, a deduction may only be claimed when the research project is abandoned or considered worthless. Now, since many product resulting from R&D don't have a specific and limited useful life, most taxpayer either opt to write off the expenditure immediately, which is no longer available or defer and amortize, which is that's what's available now because no one really capitalized them and option one is gone. So what's left is deferred and amortize. Now just real quick, the expense method, the reason I am going over the expense method to remind you to kind of plant the seed for later on that the way we account for IRS for certain expenditure is different than gap. It used to be the same taxpayer had the option to immediately expense the research and experimental expenditure if they choose to do so in their first taxable year, which was similar to gap. Once this method used to be chosen, you would have to use it constantly. However, this method is no longer available. Now we need to the to use the fertile and amortization method starting after December 31st, 2021, which is starting 2022. They must be cost for the research and experimental expenditure must be capitalized and amortized. It means treated as an expense and amortized. But also after 2022 we had few changes. Amortization began in the middle of the year when the expense are paid and incurred rather than the old rules when the taxpayer began benefiting. So we will go with the middle of the year. The year that we started to pay or incur those expenses, we start to amortize and expense them. Not in the year we start to benefit. It used to be the case. That's no longer the case. The reason I'm reminding you in case your book or your material have old information, the expenditure now are amortized evenly over five years unless it's a foreign research expense. It's amortized over 15 years. You have less time to recuperate because you are spending this money overseas in a different country. So it's evenly five years rather than a minimum of 60 month. That's no longer that's no longer available used to be the old rules. That's why I'm I'm showing it to them taking it out. If a research project is abandoned, any remaining and amortized expenditure are deducted over the remaining amortized period. That's fine. Let's go ahead and look at an example. Silverstone decided to embark on the development of a new line of paints. The project commenced 2023 and the company incurred the following expenditure, wages, supplies, material and depreciation. All R&D related research and experimental related a total of 290,000. The project's benefits are anticipated to begin July 2023. If the company elect the third and amortized, which is that's what we do now since the immediate amortization is no longer available. It's research over 60 month. What would be the corresponding deduction in 2023 2024? Okay, what are the rules? The rules are the year that you start. You will start there assuming mid year. Therefore, you expense you incur 290,000 divided over five years, $58,000 per year for year one, you multiply by one half. Assume, notice here, in the middle of the year, amortization began in the middle of the year when the expenses are paid or incurred. Now, for the year 2024, you're going to have a full year, which is $58,000. And this is what you need to know about research and experimental expenditure, how to account for those because the immediate expense is gone and capitalization is just to capitalize it. You treat this as an asset and you wait, which is no one really use it. And also, you need to know that this is important for companies because they want to spread the expenses. Sometimes you want to spread the expenses for future years when you have a future revenue. What should you do now? You go to Farhad Lectures, look at additional MCQs that's going to help you understand the concepts, true, false, additional exercises, lecture, whether you are a CPA candidate and an old agent or an accounting student, invest in yourself. Good luck, study hard and, of course, stay safe.