Cal. Code Regs. Tit. 18, § 24365-24368(c) - Treatment as Expenses

(1) In General. Research or experimental expenditures paid or incurred by a taxpayer during the income year in connection with its trade or business are deductible as expenses, and are not chargeable to capital account, if the taxpayer adopts the method provided in Section 24365. See subsection (2) of this regulation. If adopted, the method shall apply to all research and experimental expenditures paid or incurred in the income year of adoption and all subsequent income years, unless a different method is authorized by the Franchise Tax Board under Section 24365(c) with respect to part or all of the expenditures. See subsection (2) (C) of this regulation. Thus, if a change to the deferred expense method under Section 24366 is authorized by the Franchise Tax Board with respect to research or experimental expenditures attributable to a particular project or projects, the taxpayer, for the income year of the change and for subsequent income years, must apply the deferred expense method to all such expenditures paid or incurred during any of those income years in connection with the particular project or projects, even though all other research and experimental expenditures are required to be deducted as current expenses under this regulation. In no event will the taxpayer be permitted to adopt the method described in this regulation as to part of the expenditures relative to a particular project and adopt for the same income year a different method of treating the balance of the expenditures relating to the same project.

(2) Adoption and Change of Method.

(A) Adoption Without Consent. The method described in this regulation may be adopted for any income year beginning after December 31, 1960, and ending after June 23, 1961. The consent of the Franchise Tax Board is not required if the taxpayer adopts the method for the first such income year in which it pays or incurs research or experimental expenditures. The taxpayer may do so by claiming in its tax return for such year a deduction for its research or experimental expenditures. If the taxpayer fails to adopt the method for the first income year in which it incurs such expenditures, it cannot do so in subsequent income years unless it obtains the consent of the Franchise Tax Board under Section 24365(b)(2) and paragraph (B) of this subsection. See, however, paragraph (D) of this subsection, relating to extensions of time.

(B) Adoption With Consent. A taxpayer may, with the consent of the Franchise Tax Board, adopt at any time the method provided in Section 24365. The method adopted in this manner shall be applicable only to expenditures paid or incurred during the income year for which the request is made and in subsequent income years. A request to adopt this method shall be in writing and shall be addressed to the Franchise Tax Board, P.O. Box 1468, Sacramento, CA 95812-1468. The request shall set forth the name and address of the taxpayer, the first income year for which the adoption of the method is requested, and a description of the project or projects with respect to which research or experimental expenditures are to be, or have already been, paid or incurred. The request shall be signed by a principal officer of the corporation or its duly authorized representative and shall be filed not later than the last day of the first income year for which the adoption of the method is requested. See, however, paragraph (D) of this subsection, relating to extensions of time.

(C) Change of Method. An application for permission to change to a different method of treating research or experimental expenditures shall be in writing and shall be addressed to the Franchise Tax Board, P.O. Box 1468, Sacramento, CA 95812-1468. The application shall include the name and address of the taxpayer, shall be signed by a principal officer of the corporation or its duly authorized representative, and shall be filed not later than the last day of the first income year for which the change in method is to apply. See, however, paragraph (D) of this subsection, relating to extensions of time. The application shall--

(i) State the first year to which the requested change is to be applicable;

(ii) State whether the change is to apply to all research or experimental expenditures paid or incurred by the taxpayer, or only to expenditures attributable to a particular project or projects;

(iii) Include such information as will identify the project or projects to which the change is applicable;

(iv) Indicate the number of months (not less than 60) selected for amortization of the expenditures, if any, which are to be treated as deferred expenses under Section 24366;

(v) State that, upon approval of the application, the taxpayer will make an accounting segregation on its books and records of the research or experimental expenditures to which the change in method is to apply; and

(vi) State the reasons for the change. If permission is granted to make the change, the taxpayer shall attach a copy of the letter granting permission to its income tax return for the first income year in which the different method is effective.

Notes

Cal. Code Regs. Tit. 18, § 24365-24368(c)

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).
2. Change without regulatory effect pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3).[FN*]
This regulation is substantially the same as Section 26 CFR 1.174-3.

Note: Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24365- 24368, Revenue and Taxation Code.

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).
2. Change without regulatory effect pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3).