Authored by RSM US LLP
The IRS released Notice 2024-12 to favorably clarify proposed section 174 research and experimental rules under Notice 2023-63 and to broaden taxpayers’ ability to rely on such rules. Simultaneously, the IRS released Revenue Procedure 2024-9, providing modified and new procedures for changing accounting methods for the capitalization and amortization of research or experimental expenses (SRE expenses), including SRE expenses allocable to section 460 long-term contracts. The new guidance items provide favorable and much-needed provisions to assist taxpayers wishing to rely on one or more of the proposed rules in Notice 2023-63 for their 2023 tax years.
The IRS and Treasury rung in the new year with new guidance on the capitalization and amortization of section 174 specified research and experimental expenditures (SRE expenses). In late 2023, the IRS and Treasury released Notice 2023-63, providing proposed, interim guidance under the new section 174 rules that require capitalization and amortization of SRE expenses. Notice 2024-12 clarifies certain of the interim guidance in Notice 2023-63, while Revenue Procedure 2024-9 modifies and expands procedures to obtain automatic consent for accounting method changes to implement one or more of the proposed rules in Notice 2023-63, including providing a new automatic method change for SREs allocable to long-term contracts accounted for under the percentage of completion method (PCM). See our previous for more information on prior guidance the IRS has released with respect to section 174 capitalization.
Notice 2024-12 provides taxpayer-favorable clarifications and modifications of proposed, interim rules in Notice 2023-63. Specifically, Notice 2024-12 clarifies and modifies Notice 2023-63 in the following ways:
Rev. Proc. 2024-9 expands earlier procedural guidance issued Rev. Procs. 2023-8 and 2023-11 to obtain automatic consent for method changes related to SRE expenses, in order to facilitate taxpayers’ reliance on one or more of the proposed rules in Notice 2023-63, as modified by Notice 2024-12. Rev. Proc. 2024-9 modifies earlier procedures in the following, significant ways:
The new guidance generally means good news for taxpayers, particularly as it allows taxpayers to selectively choose which, if any, provisions of Notice 2023-63, as modified by Notice 2024-12, to apply and permits an automatic change for SRE expenses allocable to section 460 long-term contracts. Clarifications with respect to the proposed contract research rules in Notice 2023-63 are likely to favorably impact research providers that may have interpreted the provisions of Notice 2023-63 as requiring them to treat otherwise deductible costs as SRE expenses. However, taxpayers should keep in mind that any changes for the 2023 tax year generally must be made with a Form 3115 and cannot be implemented merely through attaching a statement to the return. Additionally, the IRS and Treasury still plan to issue proposed regulations providing more substantive guidance under section 174. It is anticipated that these regulations will be issued sometime in late Spring and may impact taxpayers’ treatment of SRE expenses further.
Taxpayers that undertake research activities, whether on their own behalf or under contract, should discuss with their tax advisers whether reliance on one or more of the provisions in Notice 2023-63, as modified by Notice 2024-12, is advisable, and the required steps in order to implement such provisions.
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This article was written by Justin Silva, Kate Abdoo, Ryan Corcoran, David Hudson and originally appeared on 2024-01-05.
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