Final answer:
Equipment used in R&D that has alternative uses is capitalized, while equipment with no alternative use after the R&D is expensed. The R&E tax credit provides a tax reduction to firms based on their R&D spending, which encourages further research investment.
Step-by-step explanation:
The accounting treatment of equipment acquired for use in R&D projects varies based on whether the equipment can have alternative future uses or is of no alternative use after the R&D activities. If the equipment can be used in other projects beyond the initial R&D, it should be capitalized and depreciated over its useful life. However, when the equipment has no alternative use, its cost is often expensed in the period it is acquired. This treatment impacts financial statements and the firm's tax liabilities.
A complementary way to support R&D without direct government intervention is via a research and experimentation (R&E) tax credit. Companies receive a tax credit based on the amount they spend on R&D, which incentivizes further investment in research. This policy has been shown to be cost-effective, and studies suggest that for every dollar of tax credit, there is at least a dollar invested in R&D, with some studies indicating a benefit to cost ratio as high as 2 or 2.96.