New IRS Amendments to the Amortization of Specified Research or Experimental Expenditures

New IRS Amendments to the Amortization of Specified Research or Experimental Expenditures

Thought Leadership by KBKG

The Internal Revenue Service (IRS) issued updates regarding the amortization of specified research or experimental (SRE) expenditures under Section 174. These modifications, outlined in Notice 2024-12 and complemented by Rev. Proc. 2024-9, introduce crucial changes that tax professionals should be cognizant of as they guide clients through the complexities of capitalization and amortization requirements.

Overview:

Notice 2024-12 revisits and refines the interim guidance provided in Notice 2023-63, offering additional clarity on the treatment of SRE expenditures. Accompanied by Rev. Proc. 2024-9, released on December 22, 2023, the notices collectively address key modifications that impact the way businesses should approach the amortization of these expenditures.

Key Takeaway

The Notices are effective for taxable years ending after September 8,  practitioners can rely on the clarified rules for expenditures incurred after December 31, 2021.

Modifications

  1. Clarifications are provided for costs incurred by research providers for research performed under contract.

    • Section 6.04 of Notice 2023-63 is clarified to avoid misinterpretations, ensuring that research providers not bearing financial risk do not improperly treat costs as SRE expenditures.
    • The introduction of excluded SRE product rights distinguishes cases where costs are not considered SRE expenditures.

  2. The requirement that taxpayers must adhere to rules described in sections 3 through 9 of Notice 2023-63 when relying on any provision from the previous notice.

    • Taxpayers can rely on rules in sections 3 through 9 of Notice 2023-63 for expenditures after December 31, 2021, with flexibility in choosing specific rules to apply.
    • Section 10 of Notice 2023-63 is modified to ease administrative burdens for taxpayers.

  3. Section 5 of Rev. Proc. 2000-50 is obsoleted only for expenditures incurred after December 31, 2021.

    • Section 5 is officially removed as obsolete for amounts paid or incurred after December 31, 2021, while it continues to apply for earlier taxable years.

  4. Procedural Guidance under Rev. Proc. 2024-9:

    • Proc. 2024-9 provides procedures for obtaining automatic consent for changing methods of accounting for expenditures after December 31, 2021.

Main Change and Key Revisions

The Tax Cuts and Jobs Act (TCJA) introduced significant changes, mandating the capitalization and amortization of specified research and experimental (SRE) expenditures. Key revisions include:

Amortization Periods:

  • 5 years for domestic research.
  • 15 years for foreign research.

Expanded Definition of SRE Expenditures:

  • Now includes software development costs.
  • Encompasses certain costs previously expensed, such as certain operation and management costs used in the performance of SRE activities, and relevant travel expenses.

Exclusion of Certain Costs:

  • Land, land improvements, and costs related to mineral and gas exploration remain excluded.

Effective Date:

  • Changes apply to taxable years beginning after December 31, 2021.

Additional Points:

  • The IRS issued Notice 2023-63 in September 2023, offering preliminary guidance on TCJA changes.
  • Some stakeholders criticize the changes for potentially discouraging investment in research and experimental activities.

Staying informed of these modifications is crucial for tax professionals to provide accurate advice to clients, ensure compliance with the evolving tax landscape, and prepare for forthcoming proposed regulations. The Notices are effective for tax years ending after September 8, 2023, but practitioners can rely on the clarified rules for expenditures incurred after December 31, 2021, until the regulations are officially published in the Federal Register.

Further Reading