Tax Byte
BREAKING: IRS Issues Much-Anticipated Section 174 Guidance
Happy Friday before September 15, tax pros. With stellar timing, the IRS has issued much-anticipated guidance intended to clarify the application of § 174, as amended by the 2017 law commonly known as the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).
The guidance in Notice 2023-63 provides a preview of the Treasury Department and IRS’s intent to issue proposed regulations addressing:
- Capitalization and amortization of specified research or experimental (SRE) expenditures under § 174, as amended;
- Treatment of SRE expenditures under § 460; and
- Application of § 482 to cost sharing arrangements involving SRE expenditures.
Background
Generally, TCJA’s amendment to § 174 requires U.S.-based and non-U.S-based research and experimental (R&E) expenditures to be capitalized and amortized over a period of five or 15 years, respectively, for amounts paid in tax years starting after December 31, 2021. Additionally, the TCJA’s § 174(c)(3) requires that any amount paid or incurred in connection with the development of any software in taxable years beginning after December 31, 2021, be treated as an R&E expenditure.
Looking Ahead
The Treasury Department and the IRS intend to issue proposed regulations consistent with the guidance provided in sections 3 through 9 of Notice 2023-63, applicable for taxable years ending after September 8, 2023. That’s why we’re referring to this subregulatory guidance as a preview of sorts. Additionally, Treasury and the IRS intend to issue guidance providing clarity in determining whether certain activities constitute software development for purposes of § 174(c)(3), as well as to provide procedures for taxpayers to obtain automatic consent to change methods of accounting to comply with this notice.
Notably, the guidance in the notice does not apply for purposes of determining whether an expenditure paid or incurred for taxable years beginning before January 1, 2022, is an R&E expenditure under § 174 as in effect for tax years beginning before January 1, 2022 (former § 174). However, taxpayers may choose to rely on the rules described in sections 3 through 9 of this notice prior to the publication date of the forthcoming proposed regulations in the Federal Register, including for expenditures paid or incurred in taxable years beginning after December 31, 2021, so long as the taxpayer relies on all the rules in sections 3 through 9 of this notice and applies them in a consistent manner. Taxpayers may not rely on the rules in section 7 of this notice for SRE expenditures paid or incurred with respect to property that is contributed to, distributed from, or transferred from a partnership.
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