Sign up for a free 7-day trial and ask it. For purposes of determining whether the in-house research for that work is clinical testing, the member performing the clinical testing shall be treated as carrying on any trade or business carried on by the member on whose behalf the clinical testing is performed. (B) “Insufficient testing population.” The testing population in the United States is insufficient if there are not within the United States the number of available and appropriate human subjects needed to produce reliable data from the clinical investigation. Therefore, even though L accounts to C for the expenses, L is subject to the section 274 deduction limitations. (iii) Pass-through in the case of a partnership -. Funding for qualified clinical testing expenses determinable only in subsequent taxable years. Whether or not this primary purpose test is met shall be determined in light of all of the facts and circumstances. However, such a meeting or convention of employees might come within the scope of subdivisions (iii) or (v) of this subparagraph. (2) The amount of the lease expense paid to a person outside the group. Any expenditure for food or beverages furnished to an individual under circumstances of a type generally considered conducive to business discussion (taking into account the surroundings in which furnished, the taxpayer's trade, business, or income-producing activity, and the relationship to such trade, business or activity of the persons to whom the food or beverages are furnished) is not subject to the limitations on allowability of deductions provided for in paragraphs (a) through (e) of this section. 262), and. See also paragraph (c)(4) of this section relating to expenditures made in a clear business setting. To make an election to have section 28 apply for its taxable year, the taxpayer shall file Form 6765 (Credit for Increasing Research Activities (or for claiming the orphan drugs credit)) containing all the information required by that form. Club dues paid or incurred after December 31, 1993. If one member of a group conducts clinical testing on behalf of another member, the member conducting the clinical testing shall include in its qualified clinical testing expenses any in-house research expenses for that work and shall not treat any amount received or accrued from the other member as funding the clinical testing. Expenses closely connected with directly related entertainment. (3) Such other specific classes of expenditure generally considered to be for a gift as the Commissioner, in his discretion, may prescribe. For example, if, prior to designation under section 526, the taxpayer incurred costs of $125,000 to test the drug for the rare disease or condition for which it is subsequently designated and incurred $500,000 to test the same drug for other diseases, and if, on the date of designation, the taxpayer expects to incur costs of $1.2 million to test the drug for the rare disease or condition for which it is designated, the taxpayer shall include in its cost computation both the $125,000 incurred prior to designation and the $1.2 million expected to be incurred after designation to test the drug for the rare disease or condition for which it is designated. (C) Reimbursement arrangements involving persons that are not employees. Except as otherwise provided in paragraph (b)(3) of this section, the term “qualified clinical testing expenses” means the amounts which are paid or incurred during the taxable year which would constitute “qualified research expenses” within the meaning of section 41(b) (relating to the credit for increasing research activities) as modified by section 28(b)(1)(B) and paragraph (b)(2) of this section. (ii) The entertainment directly preceded or followed a substantial and bona fide business discussion as defined in subparagraph (3) of this paragraph. It must be established, however, that the taxpayer actively engaged in a business meeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining income or other specific trade or business benefit. Pass-through in the case of an estate or a trust. (B) Exclusion of costs funded by another person. If, at the time the taxpayer files its return for a taxable year, it is impossible to determine to what extent some or all of the qualified clinical testing expenses may be funded, the taxpayer shall treat the clinical testing expenses as fully funded for purposes of that return. A similar expenditure made at a bona fide meeting of stockholders of the taxpayer for the election of directors and discussion of corporate affairs would also be within the provisions of this exception. This paragraph (c)(6) applies to club dues paid or incurred before January 1, 1987. Expenditures for entertainment, even if connected with the taxpayer's trade or business, will generally be considered not directly related to the active conduct of the taxpayer's trade or business, if the entertainment occurred under circumstances where there was little or no possibility of engaging in the active conduct of trade or business. Definition of controlled group of corporations. The preceding sentence shall not apply to any amount paid or incurred by the taxpayer if such amount is required to be included (or would be so required except that the amount is less that $600) in any information return filed by such taxpayer under part III of subchapter A of chapter 61 and is not so included. (F) Effective/applicability date. Because the reimbursement payment is not treated as compensation and wages paid to Y, under section 274(e)(3)(A) and paragraph (f)(2)(iv)(B)(1) of this section, Y is not subject to the section 274 deduction limitations. Thus, if an activity is generally considered to be entertainment, it will constitute entertainment for purposes of this section and section 274(a) regardless of whether the expenditure can also be described otherwise, and even though the expenditure relates to the taxpayer alone. A partner's share of an in-house research expense or contract research expense paid or incurred by a partnership other than in carrying on a trade or business of the partnership constitutes a qualified clinical testing expense of the partner if -, (1) The partner is entitled to make independent use of the result of the clinical testing, and. Any expenditure by a taxpayer for entertainment which is directly related to bona fide business meetings of the taxpayer's employees, stockholders, agents, or directors held principally for discussion of trade or business is not subject to the limitations on allowability of deductions provided for in paragraphs (a) through (e) of this section. content. Thus, the cost of producing night club entertainment (such as salaries paid to employees of night clubs and amounts paid to performers) for sale to customers or the cost of operating a pleasure cruise ship as a business will come within this exception. Any expenditure paid or incurred before January 1, 1979, with respect to a facility, or paid or incurred before January 1, 1994, with respect to a club, used in connection with entertainment shall not be allowed as a deduction except to the extent it meets the requirements of paragraph (a)(2)(ii) of this section. An expenditure for entertainment shall be considered directly related to the active conduct of the taxpayer's trade or business if it is established that the expenditure was for entertainment occurring in a clear business setting directly in furtherance of the taxpayer's trade or business. (4) Expenditures in clear business setting. In 1950, the United Nations General Assembly adopted the Uniting for Peace Resolution, which authorized the General Assembly to maintain peace if the United Nations Security Council failed to do so. For purposes of this section, the term “controlled group of corporations” shall have the meaning given to the term by section 41(f)(5). (3) Expenditures with respect to a facility used in connection with entertainment -. Except as otherwise provided in this paragraph (d)(3), expenses paid or incurred with respect to clinical testing conducted outside the United States (as defined in section 7701(a)(9)) are not eligible for credit under this section. As provided in section 274(m)(3), the term other individual does not include a business associate (as defined in paragraph (b)(2)(iii) of this section) who otherwise meets the requirements of sections 274(m)(3)(B) and (C). This exception applies not only to expenditures for food or beverages furnished in a typical company cafeteria or an executive dining room, but also to expenditures with respect to the operation of such facilities. (1) In general. If, without application of this paragraph (d)(5)(iii), an organization would be a member of more than one group at the end of its taxable year, the organization shall be treated as a member of the group in which it was included for its preceding taxable year. (ii) Certain transportation facilities. For rules and definitions with respect to: (i) “Directly related entertainment”, see paragraph (c) of this section. (b) Club dues paid or incurred after December 31, 1993. Certain Expenses of the United Nations (Article 17, paragraph 2, of the Charter) Cases Previous Next Overview of the case Request for Advisory Opinion Written proceedings Oral statements Orders Advisory opinions Summaries of Advisory Opinions and Orders Press releases See also paragraph (e)(3)(iii)(b) of this section for provisions covering nonentertainment expenditures with respect to such facilities. (ix) Entertainment sold to customers. All of the facts and circumstances of each case shall be considered in determining the primary use of a facility. Expenditures paid or incurred after December 31, 1978, and not with respect to a club. Section 1.274-2. For example, an expenditure by a taxpayer to furnish refreshments to his employees at a bona fide meeting, sponsored by the taxpayer for the principal purpose of instructing them with respect to a new procedure for conducting his business, would be within the provisions of this exception. In addition, the phrase includes losses realized on the sale or other disposition of a facility. The Court, in its Advisory Opinion of 20 July 1962, replied in the affirmative that these expenditures were expenses of the United Nations. This website requires JavaScript. The taxpayer shall reduce the amount paid or incurred by the taxpayer for the clinical testing expenses that would, but for section 28(b)(1)(C) constitute qualified clinical testing expenses of the taxpayer by the amount of the funding determined under the preceding sentence. Taxable years beginning before January 1, 1984. (2) Definition of “human clinical testing.” Testing is considered to be human clinical testing only to the extent that it uses human subjects to determine the effect of the designated drug on humans and is necessary for the designated drug either to be approved under section 505(b) of the Federal Food, Drug, and Cosmetic Act and the regulations thereunder (21 CFR part 314), or if the designated drug is a biological product (other than a radioactive biological product intended for human use), to be licensed under section 351 of the Public Health Services Act and the regulations thereunder (21 CFR part 601). (c) Taxpayer's trade or business and relationship of persons entertained.