Abstract
Tax is frequently an important determinant of accounting choices. This study investigates the impact of tax incentives on certain accounting choices associated with research and development (R&D) expenditures. The empirical evidence suggests that firms facing a higher tax rate exhibit a significantly lower capitalisation ratio of R&D expenditures than firms facing a lower tax rate because of the higher tax benefits associated with expensing R&D expenditures. Further, the negative relation between tax rate and the capitalisation ratio of R&D expenditures is more pronounced for firms with lower financial reporting costs, for non-state-owned enterprises, and for firms in districts with weak tax enforcement. These findings contribute to the literature on accounting choices motivated by tax considerations and provide new explanation for the accounting choices associated with R&D expenditures.
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