IRS issues Revenue Ruling on the Deductibility of Research and Experimental Expenditures
by Jonathan Tucker, Principal | KBKG, 4/18/2023
Revenue Ruling 58-74 No Longer Applicable – The IRS issued Revenue Ruling 2023-8, making obsolete Revenue Ruling 58-74 on a prospective basis as of July 31, 2023. This means that taxpayers can no longer file an amended return to deduct missed research or experimental expenditures subject to former Section 174(a).
What is Revenue Ruling 58-74?
This revenue ruling historically allowed taxpayers to fix and amend for any missed Section 174 research and experimental expenditures if a taxpayer’s method of accounting for Section 174 research and experimental expenditures was to expense such expenditures when incurred. When a taxpayer deducts Section 174 research and experimental expenditures on its tax return in the first taxable year in which it incurs such expenditures, a method of accounting has been established and must be followed until a changes of accounting method is applied for. Since a taxpayer’s method of accounting is the expense method, Revenue Ruling 58-74 tells taxpayer to “file a claim for refund or amended return to deduct additional research or experimental expenditures in the year or years when the expenditures were paid or accrued.”
Why Revenue Ruling 2023-8
The IRS can obsolete Revenue Rulings because: “(1) the applicable statutory provisions or regulations have been changed or repealed; (2) the ruling position is specifically covered by a statute, regulation, or subsequent published position; or (3) the facts set forth no longer exist or are not sufficiently described to permit clear application of the current statute and regulations.” Point (3) seems to apply to the evaluation of Revenue Ruling 58-74. In addition, the IRS had concerns taxpayer’s use of Revenue Ruling 58-74 could be violating certain rules that do not allow for changing a method of accounting on an amended return. Revenue Ruling 2023-8 makes known “whether a change in accounting treatment of amounts paid or incurred for research or experimentation expenditures constitutes a change in method of accounting or the correction of an error depends on the specific facts of a particular situation…Whether a change in accounting treatment of amounts paid or incurred for research or experimentation expenditures constitutes a change in method of accounting or the correction of an error depends on the specific facts of a particular situation.”
Revenue Ruling 58-74 is no longer applicable as of July 31, 2023 as it could conflict with other guidance and the facts set forth no longer exist or are not sufficiently described to apply Revenue Ruling 58-74. Taxpayers can rely on Revenue Ruling 58-74 ruling until then. However, the ruling states the IRS will challenge the applicability of Revenue Ruling 58-74 when applicable.
- AICPA Pens Letter Urging Congress to Defer R&D Expense Capitalization (Sec 174) Provision Until 2026
- IRS Issued Additional Guidance on Section 174, Specified Research or Experimental Expenditures
- KBKG Tax Insight: Tax Court Denies Construction Company R&D Credits
About the Author
Jonathan Tucker – Principal
Jonathan Tucker is based in Atlanta, GA, and has over 18 years of experience providing federal business tax advisory services, primarily in R&D tax credits and fixed asset/cost segregation reviews, to clients in various industries including technology, manufacturing, transportation, healthcare, retail and consumer products, hospitality, media and entertainment, financial, and other professional services industries. » Full Bio