Question on Section 174 deductions for two person S corporation

Hello:

I own a S Corporation in California with my wife and I as the only employees in it currently (before last year we had one more employee, non-related, hired through a local college to help with running some heat/endurance tests on our prototype model). Over the past 2 years we have designed a couple of systems (medical devices) to aid surgeons during two specific surgeries. Our S corp had some revenue for the first 4 months of last year doing R&D work for a medical devices company (completely different type of work than our own product). We paid ourselves throughout the year while we continued our own research & experimentation to improve our product which we are hoping to start selling after July this year (we had done a preliminary demo in front of prospective buyer and it went very successful). Here are my questions:

  1. Does our situation qualify for Section 174 R&E deductions? If so, are the wages we paid ourselves deductible? I'm referring to only the wages we paid ourselves for our own R&E project, we have kept details of hours/records separately)
  2. We have reported total wages we paid to ourselves last year on line 8 of
1120S. If our wages are "R&E expenses" per section 174, does this amount get deducted again on any other line on 1120S form? If not, what does it mean by "Section 174 deductions", where do they go? Do they lower taxes for us considering we have already listed wages we paid ourselves on line 8 of 1120S?
  1. If we qualify for Section 174 deductions, does anything get reported on Schedule K-1?
  2. If we qualify for Section 174 deductions, do we also qualify IN ADDITION to get "Research & Experimentation Credit" per Code 41? (We've had gradually increasing R&D each year for the past 4 years, all documented including details of each project - some have turned into products and already made money)
  3. I don't think we qualify for this but... are we also qualified for Section
174 deductions on R&D we did for a client company who paid us for it?

Thank you for any response, have a great weekend!

-Desi

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