R&E Amortization Updates
On December 12th, 2022, the Service released an advance copy of Rev. Proc. 2023-8, which provides procedural guidance for taxpayers to adopt accounting methods for specified research or experimental expenditures under Code section 174 as modified by the Tax Cuts & Jobs Act, Pub. Law No. 115-97. https://www.irs.gov/pub/irs-drop/rp-23-08.pdf The revenue procedure generally provides that a taxpayer may make an automatic change on a cut-off basis for the first taxable year beginning after December 31, 2021 using a statement in lieu of a Form 3115. Taxpayers who have already filed their 2022 tax return, (e.g. a short tax year), will be considered to have made an automatic method change if certain requirements are met. Finally, the revenue procedure provides a “modified” section 481(a) adjustment for taxpayers who make a method change in a post-2022 tax year.
In 2017, Congress passed the Tax Cuts & Jobs Act (TCJA). As part of the act, Congress enacted revenue-raising provisions that affected R&E costs. The Joint Committee on Taxation (JCT) estimated that the R&E change would raise $119.7 billion over the next ten years. Section 13206 of the TCJA made two changes to R&E-related provisions for costs paid or incurred in tax years beginning after December 31, 2021.
General Application Procedures
Taxpayers may now make Designated Change Number 265 to commence capitalizing specified research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021. The revenue procedure adds new section 7.02 to Rev. Proc. 2022-14 for this change. The change applies to the post-2021 tax year specified research or experimental expenditures, including software development expenditures. The change is made on a cut-off basis without an adjustment for prior year costs. A taxpayer may use a statement in lieu of a Form 3115. For 2022, the statement must include the following information for each applicant:
For tax years after the first tax year beginning after December 31, 2022, (post-2022 filers), taxpayers make the accounting method change must file a Form 3115. The attached statements to the Form 3115 must include:
The post-2022 change must be made using a modified section 481(a) adjustment. Under this modified section 481(a) adjustment, the applicant must take into account all specified research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021.
Short Tax Year Filers
Taxpayers who file a Federal tax return on or before January 9th, 2023 for a tax year beginning after December 31, 2021 will be deemed to have complied with this automatic method change if the taxpayer:
Other Procedural Matters
For the taxpayer’s first taxable year beginning after December 31, 2022, the five-year item eligibility rule of Rev. Proc. 2015-13 is waived. In other words, taxpayers may change their method of accounting for specified research or experimental costs in 2022 even if they have previously changed a method of accounting for these costs in the prior five years. Taxpayers do not receive audit protection for costs paid or incurred in pre-2022 tax years.