174 UPDATE - NOTICE 2024-12 & REV PROC 2024-9

On December 22nd, 2023, the Service released both Notice 2024-12 and Rev. Proc. 2024-9. Notice 2024-12 clarifies and modifies Notice 2023-63 on the capitalization and amortization of specified research or experimental (SRE) expenditures under Code §174 with respect to the treatment of costs paid or incurred by a research provider for research performed under contract, the requirement that taxpayers must rely
on all the rules of section 3 through 9 of the prior notice, and the obsoletion of section 5 of Rev. Proc. 2000-50. Rev. Proc. 2024-9 modifies and clarifies the automatic method change procedures for SRE expenditures and software development costs under Rev. Proc. 2000-50.


Contract Research

Under section 4.03 of Notice 2023-63, a research provider must capitalize costs it pays or incur incident to SRE activities. The new notice clarifies Notice 2023-63 to provide that when a research provider does not bear financial risk under the terms of the contract with the research recipient, obtains an excluded SRE product right, and does not obtain any other SRE product right under the terms of the contract, then the incidental costs are not capitalizable SRE expenditures. Under Notice 2023-63, an “SRE product” is “any pilot model, process, formula, invention, technique, patent, computer software, or similar property (or a component thereof) that is subject to protection under applicable domestic or foreign law.” Under the new notice, an “SRE product right” is a right arising under the terms of the contract with the research recipient for the research provider to use any resulting SRE product in its trade or business or otherwise exploit any resulting SRE product through sale, lease, or license. An “excluded SRE product right” is a right that either was separately bargained for (apart from the consideration paid for the SRE activities) or was acquired for the limited purpose of performing SRE activities under a contract with the research recipient.

Notice 2023-63 Applicability Date Change

The new notice allows taxpayers to pick and choose which sections of Notice 2023-63 it may rely on. Notice 2024-12 modifies Notice 2023-63 so that it now provides that taxpayers no longer need to use all rules in sections 3 through 9 if it chooses to rely on any of them.

Rev. Proc. 2000-50 Obsoletion

Notice 2024-12 clarifies section 12 of Notice 2023-63 to provide that section 5 of Rev. Proc. 2000-50 is obsolete for taxable years beginning after December 31, 2021. It will continue to apply to amounts pair or incurred in years beginning or before December 31, 2021.


Rev. Proc. 2024-9 modifies and clarifies Rev. Proc. 2023-24 to provide procedural guidance to implement Notice 2023-63 as modified by Notice 2024-12.

  • The revised section allows taxpayers to make an automatic change in their second post-2021 tax year, effectively waiving the two-year rule of Rev. Rul. 90-38 for this CAM.
  • The five-year item eligibility rule of Rev. Proc. 2015-13 is waived, allowing taxpayers to change the same method for the same item automatically within a five-year period.
  • For its first post-2021 tax year, taxpayers must continue to make the change on a cut-off basis. For their second post-2021 tax year, taxpayers may use either a modified §481(a) adjustment or, if the adjustment is negative, a cut-off basis.
  • The CAM does not apply to changing from treating SRE expenditures as amortizable in the hands of a §351 transferee to treating them as amortizable in the hands of the transferor. Taxpayers will receive audit protection for its first post-2021 taxable year’s SRE expenditures if they made, or attempted to make, a change to comply with Code §174 in their first post-2021 tax year and then filed a successive CAM to adopt Notice 2023-63 in their second post-2021 tax year. Audit protection is not available for pre-2022 SRE expenditures or if the taxpayer did nothing with respect to SRE expenditures in its first post-2021 tax year.

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