Design and development costs related to the products to be sold should be counted as expenses as they are incurred, while design and development costs related to molds, dies, or other tools owned by the supplier generally should be capitalized, unless they are related with the new technology. At first glance, the shorter amortization period of 48 months with the set of costs method seems to be preferable to the 60-month amortization period with the design method. However, there is significant compensation that represents a potential trap for the unwary. All package design costs must be capitalized and amortized according to the cost set method, including the costs of package designs that were never put into service.
In addition, as stated above, the early amortization of abandoned or discarded package designs under the cost-combination method is not allowed. Compare this result to the design method, which allows the taxpayer to deduct the unamortized portion of the package design costs in the year in which they were scrapped or abandoned. When it comes to creating an asset, design is an essential part of it and thus should be capitalized. Under the cost-set capitalization method and 48-month amortization (cost-set method), all package design costs must be capitalized.
The costs associated with coupon inserts, refund offers, and other short-term changes related to the promotion are specifically excluded from the definition of package design cost. From this example, it is clear that for most taxpayers, the design method should be their optimal choice. The implementation of the revenue procedure is further complicated depending on whether and when the question of design costs has been raised.
