IRC Section 174 governs research and development (R&D) expenditures.  Qualifying R&D are those R&D cost commonly used the experimental or laboratory sense (e.g. new product development) where examples include cost of developing or improving an item, process, technique, formula or invention or  obtaining a patent and both in-house nd purchased costs qualify.  One of two options for deducting R&D costs can be used:  (1) deduct R&D expenditures as they are paid or incurred (depending whether a contractor uses the cash or accrual method) or (2) defer the costs and amortize them over a period not less than 60 months, beginning with the first month the taxpayer benefits from the expenditure (e.g. sells the first units of the item).  The first method reduces current tax liability while the second is advantageous if the contractor is not in a taxable position or expects to be in a higher one later.  Either option must be identified on a tax return and is binding on future taxable years.  It is, of course, possible to have different amortization periods for different R&D projects.

Changes to the tax laws provide that R&D expense incurred in a tax year be reduced by the amount of the R&D tax credit (discussed below).

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