What are 'Research And Development (R&D) Expenses'
Research and development (R&D) describes activity or expense associated with the research and development of a company's goods or services. R&D expenses are a type of operating expense and can be deducted as such on a business tax return. This type of expense is incurred in the process of finding and creating new products or services.
BREAKING DOWN 'Research And Development (R&D) Expenses'
R&D is a type of systematic activity conducted by a company, which combines basic and applied research in an attempt to discover solutions to problems, or to create or update goods and services. The act of a company conducting its own R&D often results in the ownership of intellectual property in the form of patents or copyrights.
An important component of a company's R&D is its R&D expenses. These expenses can be relatively minor, or they can easily run into billions of dollars for large corporations. R&D expenses are usually the highest for industrial, technological, health care and pharmaceutical firms. Some companies reinvest a significant portion of their profits back into R&D, as is the case with technology companies, since they see it as an investment in their continued growth.
An Example of R&D
Tech companies rely heavily on R&D capabilities. In an environment with constant change, it's integral for a company to remain on the bleeding edge of innovation. Companies such as Facebook, for example, are investing heavily in the research development of such products as virtual reality and predictive chat bots. These endeavors allow Facebook to diversify its business and find new areas of opportunistic growth as technology continues to evolve.
On this note, large companies have also been able to conduct R&D through acquisition. Facebook's acquisition of Oculus Rift is a perfect example of this. The company already had the internal resources necessary to build out a virtual reality division, but by acquiring an existing virtual reality company, it was able to expedite the development time.
Reasons to Conduct R&D
Businesses conduct R&D for many reasons, the first and foremost being new product research and development. Before any new product is released into the marketplace, it goes through a significant research phase and development phase. Research is conducted into a product's market opportunity, cost and production timeline. After adequate research, the new product enters the development phase, where it is actually created from the concept laid out during the research phase.
Some companies use R&D to update existing products or conduct quality checks. When this happens, a business evaluates a product to ensure it's still adequate, and additional improvement ideas are posed. If the improvements are cost-effective, they're implemented during the development phase.