Tax Benefits of R&D Expensing
Earlierinthechapter,wearguedthatR&Dexpensesshould
becapitalized.Ifwedecidetodoso,though,thereisatax
benefitthatwemightbemissing.Firmsareallowedtodeduct
theirentireR&Dexpensefortaxpurposes.Incontrast,they
areallowedto deductonlythedepreciation ontheircapital
expenses.Tocapturetheadditionaltaxbenefit,therefore,we
would add the tax savings on the difference between the
entire R&D expense and the amortized amount of the
research asset to the after-tax operating income of the firm.
Asimilaradjustmentwouldneedtobe madeforanyother
operatingexpensethatwechoosetocapitalize.Earlierinthis
chapter,wenotedtheadjustmenttopretaxoperatingincome
from capitalizing R&D.
To estimate the after-tax operating income, we would
multiplythisvalueby(1−taxrate)andaddontheadditional
tax benefit from above.