Accounting for SR&ED involves activities that create or improve products or processes. The main accounting rule for SR&ED states that expenditures should be charged to expense as incurred. This is due to the uncertainty of future benefits, which make it difficult to record the expenditures as assets. Exceptions to this rule are:
- Materials or fixed assets that have alternative future uses – record as assets.
- Computer software with future alternative uses – depreciate the software over its useful life.
- Contracted services – charge invoices to expense.
- Indirect costs – a reasonable amount of overhead expenses should be allocated to SR&ED.
- Purchased intangibles – if acquired from third parties and have alternative uses, allocate as intangible assets.
- Software development – if software is developed for SR&ED activities, charge the associated costs to expense as incurred without exception.
- Wages – charge salaries and wages to expense as incurred.
Specific activities differ for each sector. However, in general they include the following:
- Researching existing products and methods in order to discover new knowledge
- Creating, testing and modifying prototypes
- Designing and testing products and processes
For more detailed information, contact Swanson Reed R&D Tax Consultants.