In addition, the application shall set forth the length of the new period or periods proposed, or the new method of treatment proposed, the reasons for the proposed change, and such information as will identify the project or projects to which the expenditures affected by the change relate. If permission is granted to make the change, the taxpayer shall attach a copy of the letter granting the permission to his income tax return for the first taxable year in which the different method or period is to be effective.
Example. N Corporation is engaged in the business of manufacturing chemical products. On January 1, 1955, work is begun on a special research project. N Corporation elects, pursuant to section 174(b), to defer the expenditures relating to the special project and to amortize the expenditures over a period of 72 months beginning with the month in which benefits from the expenditures are first realized. On January 1, 1955, N Corporation also purchased for $57,600 a building having a remaining useful life of 12 years as of the date of purchase and no salvage value at the end of the period. Fifty percent of the building's facilities are to be used in connection with the special research project. During 1955, N Corporation pays or incurs the following expenditures relating to the special research project:
Salaries | $15,000 |
Heat, light and power | 700 |
Drawings | 2,000 |
Models | 6,500 |
Laboratory materials | 8,000 |
Attorneys' fees | 1,400 |
Depreciation on building attributable to project (50 percent of $4,800 allowable depreciation) | 2,400 |
Total research and development expenditures | 36,000 |
The above expenditures result in a process which is marketable but not patentable and which has no determinable useful life. N Corporation first realizes benefits from the process in January 1956. N Corporation is entitled to deduct the amount of $6,000 ($36,000 * 12 months ÷ 72 months) as deferred expenses under section 174(b) in computing taxable income for 1956.
26 C.F.R. §1.174-4