What is the definition of domestic research or experimental expenditures for section 174A?
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For purposes of section 174A, "domestic research or experimental expenditures" are defined as research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business, but only to the extent that such expenditures are not attributable to foreign research. The term "foreign research" is defined by reference to section 41(d)(4)(F) of the Internal Revenue Code, so any expenditures that are attributable to activities meeting that definition are excluded from the scope of section 174A.
In summary, domestic research or experimental expenditures under section 174A are:
- Research or experimental expenditures (as defined by the general rules for R&E, including those in Treasury Regulation § 1.174-2) that are:
- Paid or incurred by the taxpayer in connection with the taxpayer’s trade or business,
- Not attributable to foreign research (i.e., not meeting the definition of foreign research under section 41(d)(4)(F)).
This definition is found in section 174A(b) of the Internal Revenue Code: "the term 'domestic research or experimental expenditures' means research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business other than such expenditures which are attributable to foreign research (within the meaning of section 41(d)(4)(F))".
Additionally, under section 174A(d), certain expenditures are specifically excluded from this definition, such as:- Expenditures for the acquisition or improvement of land,- Expenditures for the acquisition or improvement of property subject to depreciation or depletion allowances,- Expenditures for mineral, oil, or gas exploration.
However, software development costs are explicitly included as research or experimental expenditures for section 174A purposes.
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